Real Estate Fundamentals

Course Outline

ProEducate

4200 S. I-10 Service Rd., W., Suite 134

Metairie, LA 70001

Phone: 800-966-9866

Office Hours:

Monday-Friday, 8am – 5pm CT

www.ProEducate.com

Roy L. Ponthier, Ph.D., Ed.D., CDEI, DREI

Executive Director

9/11

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Lesson 1: An Introduction to Real Estate I. The Real Estate Industry A. Includes brokers and agents, but also property managers, relocation specialists, investment counselors,

appraisers, home inspectors, title company employees, escrow agents, and real estate developers B. Divided into residential real estate (single-family homes, apartment buildings, condominiums) and commercial real

estate (retail property, shopping centers, office buildings, and industrial property) II. Real Estate Transactions - Steps Include: A. Listing the property B. Showing the property C. Submission and consideration of offers to purchase D. Negotiation between seller and buyer E. Execution of a contract F. Property inspection G. Financing arrangements H. Appraisal of property I. Closing preparations J. Buyer’s walk-through K. Closing III. Real Estate Brokerage A. Brokers and Salespersons: A broker acts as an intermediary in a transaction. A salesperson is a licensee who

works with buyers or sellers, under the supervision of a broker B. Brokerage Services: Services provided for a seller include: 1. Pricing the property 2. Preparing the home (staging) 3. Advertising 4. Showing the home (open houses) 5. Negotiations and paperwork 6. Monitoring the closing process C. Services provided for a buyer include: 1. Determining ideal property for buyer 2. Showing selected properties 3. Advice on offer amount 4. Negotiations and obtaining financing IV. Real Estate as a Career A. Working as a real estate agent: Agents work for themselves and set their own schedules B. Real estate companies 1. Types of companies range from single-broker firms to large companies with hundreds of branch offices 2. Agents should evaluate what sort of training, facilities, and profession organization memberships are provided

for them by different brokerages 3. Agents’ duties might include performing floor duty and meeting specific sales goals C. Compensation of real estate agents 1. Agents are typically compensated by commission split among the brokers and salespersons who arranged

the transaction 2. Agents are typically independent contractors and do not have taxes withheld from earnings D. Professional associations (most prominent one is National Association of Realtors) V. Real Estate and the Law A. Types of laws 1. Statutory laws (enacted by legislative body) 2. Administrative regulations (adopted by agency officials) 3. Judicial rulings (common law rules) 4. Constitutional law B. Laws regarding real estate agents 1. Real estate license law 2. Agency law (in addition to general agency law, some states have specific statutes regarding real estate

agency relationships) 3. Law concerning transactions (contract law as well as civil rights laws) 4. Laws concerning property (such as property owners’ rights and forms of ownership)

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Lesson 2: The Nature of Real Property I. Types of Property A. Tangible vs. intangible property 1. Tangible (or corporeal) property has a physical presence 2. Intangible (or incorporeal) property is non-physical and abstract B. Real vs. personal property 1. Real property (or realty) is land, anything affixed or attached to land, and anything incidental or appurtenant

to the land 2. Personal property is usually movable, while real property is not II. Elements of Real Property A. Real property can be imagined as an inverted pyramid (including not only the land but the subsurface below and

the airspace above) B. Real property also includes improvements (anything added to or built on the land) C. The bundle of rights (such as the rights to possess, use, enjoy, encumber, will, sell, or do nothing with the land)

is also part of the real property III. Appurtenances A. Air rights 1. Air rights allow a landowner use of airspace above the land, although not in a way that interferes with normal

air traffic B. Water rights 1. Riparian rights: the rights of a landowner to use the natural flow of a stream that flows through or adjacent to

his property 2. Appropriative rights: a system where a water user must apply to the state government for a permit, which

does not require the user to own land beside the body of water 3. Ground water: subsurface water, which may be subject to either appropriative rights or overlying rights

(similar to riparian rights) C. Solid mineral rights - A landowner owns all solid minerals under the surface of her property, although mineral

rights may be sold separately from the rest of the property D. Oil and gas rights 1. Some states follow the ownership theory, where oil and gas are owned as part of the real property, similar to

solid minerals 2. Other states follow the non-ownership theory, where oil and gas are not owned until they are brought to the

surface 3. Rule of capture: a landowner owns oil or gas pumped from wells on his land, even if it migrates from

neighboring land E. Support rights 1. Lateral support is support from adjacent land 2. Subjacent support is support from underlying earth IV. Attachments A. Natural attachments 1. Natural attachments are attached to the earth by roots 2. May be frucutus naturales (grown without cultivation) or fructus industriales (cultivated by people) B. Man-made attachments - Fixtures start as personal property, but become real property when attached to the land

by people (like houses and fences) C. Annexation and severance 1. Property can be physically annexed to real property (affixed to the land) or constructive annexed (a necessary

or working part of the realty) 2. Severance occurs when something is converted to personal property by being separated from real property

(such as crops or timber) D. Fixture tests 1. There are five tests to determine whether an item is a fixture or personal property, which can be remembered

with the acronym MARIA (method of attachment, adaptation of item, relationship of parties, intention of annexor, agreement in writing)

2. Written agreement: a written agreement trumps all other tests 3. Method of attachment: items permanently attached to land are considered fixtures 4. Adaptation of item: items designed or adapted specifically for use on a particular property are considered

fixtures

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5. Intention of annexor: if annexor intended item to become part of real property, it is considered fixture 6. Relationship of parties: items installed by owners are generally considered fixtures, while items installed by

tenants are usually considered personal property (even trade fixtures, which are installed to conduct business)

E. Mobile homes 1. In many states, mobile homes are personal property until permanently attached to the land 2. Whether mobile homes are sold as real or personal property affects how they are taxed and what licensing

rules govern their sale V. Characteristics of Real Property A. Physical characteristics 1. Immobility: Land cannot be moved 2. Indestructibility: Land cannot be destroyed 3. Uniqueness: There are no identical parcels of land B. Economic characteristics 1. Scarcity: There is only a finite amount of land 2. Improvements: Land can be improved in a manner that affects its value 3. Permanence of investment: Capital and labor invested in land will provide stable returns over the long term 4. Area preference: Values of comparable parcels of land may vary because of the desirability of different

locations VI. Land Description A. Surveys 1. Legal descriptions are based on a survey of the property, which is performed in most states by a licensed

surveyor 2. Legal descriptions are used to establish lot boundaries and to prevent disputes over what land was

transferred B. Metes and bounds method 1. Property is described in reference to monuments (natural objects or fixed survey markers), courses

(compass readings), and distances (measures of length) 2. A description starts at a point of beginning, then describes each side of the property using courses and

distances until returning to the point of beginning 3. In the event of discrepancies, monuments take precedence over courses and distances C. Government survey method 1. Property (mostly in western states) is described according to a grid of lines established by federal government

surveyors 2. Each grid is identified by a principal meridian (north/south) and a base line (east/west) 3. At intervals of six miles, township lines run east/west, dividing the land into township tiers, and range lines

run north/west, dividing the land into ranges 4. The 36 square miles of land at the intersection of a township tier and a range is a township 5. Each township is divided into 36 sections of one square mile each; they are numbered 1-36 starting in the

northeast corner of the township and snaking back and forth to the southeast corner 6. Correction lines (north/south) and guide meridians (east/west) to compensate for the curvature of the earth 7. Government lots are partial sections that have an irregular shape because of correction lines or because of

a body of water D. Lot and block method - Property (in urban and suburban areas) is described by mapping the boundaries of the

lots and blocks of a subdivision on a recorded plat map E. Elevations 1. Some legal descriptions (such as those of condominiums) are for air lots and must describe the property’s

elevation above the ground 2. The property’s elevation is described according to a datum (an established plane of elevation) or a bench

mark (a subsidiary reference point)

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Lesson 3: Real Property Ownership I. Systems of Land Ownership A. Feudal system: Historically, all land belonged to the king, but land holdings were granted to a hierarchy of

noblemen B. Allodial system: Today, ordinary citizens may own land absolutely, rather than at the will of a sovereign II. Estates in Land A. Freehold estates 1. An estate is an interest in land that is or may become possessory (non-possessory interests like liens are not

estates) 2. A freehold estate is an interest that has an indeterminable duration, where the owner has title in addition to

possession 3. A fee simple absolute is the greatest estate that can exist in land, and can be theoretically held forever by

the owner and his heirs 4. A fee simple defeasible is a qualified estate that continues until a certain event occurs (a fee simple

determinable reverts to the grantor automatically without legal action, while under a fee simple subject to a condition subsequent, the grantor must take action to end the estate)

5. A life estate is a freehold estate that ends at the end of the life of a specified person (measuring life) 6. The life tenant is usually, but not always, the measuring life 7. If a life estate is an estate in reversion, it reverts to the reversioner (the grantor or his heirs) at the end of

the measuring life 8. If a life estate is an estate in remainder, it passes to a third party (the remainderman) at the end of the

measuring life 9. A life tenant may not commit waste by engaging in acts that reduce the property’s value 10. A life tenant may lease her interest in the property, but the lease would terminate with the end of the life

tenant’s estate B. Leasehold estates 1. A leasehold estate (or chattel real) grants a tenant possession of a property for a period of time, but is not an

ownership interest 2. A leasehold is created through a lease, between a landlord (or lessor) and a tenant (or lessee) 3. An estate for years (or term tenancy) is a tenancy created by express agreement for a fixed length of time

(which can be less than one year) 4. A periodic tenancy has no fixed termination date, but lasts for a specific period and continues for renews

automatically for future periods until one party gives notice of termination 5. A tenancy at will is a tenancy with the landlord’s consent for an indefinite period, which can be terminated at

any time by either party (although some states require adequate notice) 6. A tenancy at sufferance occurs when a holdover tenant who lawfully possessed a property under a lease

holds over after the lease has expired III. Methods of Holding Title A. Ownership in severalty: ownership by a natural person (a human being) or an artificial person (a corporation or

government entity) B. Concurrent ownership (or co-ownership): ownership by two or more parties 1. A tenancy in common is the most basic form of co-ownership, where two or more parties each have an

undivided interest in a property 2. Tenants in common may have equal or unequal interests, but regardless of the size of their shares they must

share possession of the entire property 3. Tenancy in common is the default method of taking title, although parties may specify tenancy in common in

their deed 4. Tenancy in common may be terminated through a partition suit, where a court will divide the ownership

interests in the property 5. Joint tenancy includes the right of survivorship (on the death of one joint tenant, her interest passes to the

other joint tenants) 6. Joint tenancy requires the four unities: unity of interest, unity of title, unity of time, and unity of possession 7. Property held in joint tenancy can’t be willed, and heirs of a joint tenant receive no interest 8. Joint tenancy terminates when one of the four unities is broken; a joint tenant may convey his interest, but this

terminates the joint tenancy with respect to the other joint tenants 9. Community property is a system of ownership for married couples in some states where property is

classified either as one spouse’s separate property or as both spouses’ community property

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10. Tenancy by the entirety is available to married couples in most non-community property states; it allows for survivorship

11. Dower and curtesy exist in a few states, giving spouses an interest in each other’s property C. Forms of business ownership 1. A partnership may be general (all partners share in profit and management, and have unlimited liability for

partnership’s debts) or limited (limited partners don’t participate in management and don’t have personal liability)

2. A corporation is owned by shareholders, who are shielded from liability 3. A limited liability company allows the flexibility of a partnership while protecting members from liability 4. A joint venture is similar to a partnership but is created only for one or several transactions 5. A trust involves a trustee who manages property for the benefit of others, such as a real estate investment

trust (REIT) IV. Common Interest Developments A. Condominiums 1. A condominium owner owns a unit in severalty, while owning common elements (like the parking and lobby)

as tenants in common with the other owners 2. A condominium is managed by a unit owners association with collects regular assessments from unit owners

to pay for maintenance of the common elements B. Townhouses and planned unit developments - Townhouse and PUD owners own the land under their unit, as

well as shared interests in the development’s common areas C. Cooperatives - A cooperative owner does not own real property, but owns shares in a corporation that owns the

building, and has a long-term proprietary lease to his unit D. Timeshares 1. A timeshare owner has the right to possess a property for a specified amount of time each year 2. A timeshare estate gives the owner a fee simple interest in the property for a specific time period, while a

timeshare use is only the right to use the property for a specific period

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Lesson 4: Transferring Ownership I. Title and Alienation A. A person who owns property has title to it B. The process of transferring title of property from one person to another is alienation II. Voluntary Alienation A. A document called a patent is used to transfer title to property from the government to a private party B. Deeds 1. The owner of real property (the grantor) uses a deed to make a conveyance of property to another party (the

grantee) 2. The general warranty deed is the most commonly used deed in most states and the one that offers the

greatest protection 3. A general warranty deed contains covenants (covenant of seisin, covenant of right to convey, covenant

against encumbrances, covenant of quiet enjoyment, covenant of further assurance, and covenant of warranty forever) that are guarantees against title defects

4. A warranty deed conveys after-acquired title, where if the grantor acquires additional interests after the deed is executed, the additional interest passes automatically to the grantee

5. A special warranty deed makes no assurances regarding defects that may have existed before the grantor acquired the property

6. A grant deed is used in some states in place of a general warranty deed, and contains only two warranties 7. A quitclaim deed contains no warranties and conveys only whatever interest the grantor has when the deed

is delivered; it is often used to correct errors in earlier deeds 8. A valid deed must be in writing, identify the parties, have a legally competent grantor, have a living grantee,

be signed by the grantor, include an adequate property description, recite the consideration, contain words of conveyance, define the interest conveyed, and state any exclusions or reservations

9. A deed may be signed by the grantor’s attorney in fact instead; the attorney in fact is appointed to act on the grantor’s behalf through a document called a power of attorney

10. Acknowledgment occurs when the grantor swears before a notary public that her signature is voluntary; this is not necessary for a valid deed, but is needed to record the deed

11. A deed becomes effective when delivery is made to the grantee and the grantee gives her acceptance C. Wills 1. A will is a document where a testator specifies how property will be distributed upon his death 2. A testator devises real property to devisees, and bequeaths personal property to legatees 3. In most states, a valid will must be in writing, signed by a testator with legal capacity, and attested to by

competent witnesses 4. Some states recognize holographic wills (in the testator’s own handwriting) or nuncupative wills (spoken

before witnesses) 5. In the probate process, a court supervises the distribution of the testator’s property, which is managed by an

executor appointed in the will III. Involuntary Alienation A. Dedication occurs when a property owner gives real property to the public, either as a gift, a statutory

requirement (as with subdivision development), or a court order B. Intestate succession occurs when a person dies without a valid will, and the decedent’s heirs receive property

according to state rules C. If a person dies without a valid will or any heirs, the person’s property will escheat to the state D. Condemnation occurs when the government uses its power of eminent domain to take private property for a

public use, in exchange for just compensation E. Court decisions, such as quiet title actions, partition suits, foreclosure actions, and bankruptcy, may result in

changes in title to property F. Adverse possession may result in transfer of title to a non-owner in possession of property, provided the

possession has been actual, open and notorious, hostile to the owner’s interest, exclusive, and continuous and uninterrupted for the required period of time

G. A person may take title to property through accession, which refers to addition to property from natural causes (such as accretion, reliction, erosion, or avulsion)

IV. Recording A. Recording procedures 1. Every state has its own recording laws that specify recording requirements and recordkeeping procedures 2. Most offices maintain both a grantor index and a grantee index; using these indexes, one can trace a

property’s chain of title backward in time

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B. Legal effects of recording 1. A person has actual notice of a fact if she actually knows about it, but has constructive notice if she should

have known about it, whether or not she actually did 2. Recording a document gives constructive notice to the world of the property interest established in the

document 3. Recording a document also establishes the priority of interests in a property 4. Inquiry notice arises in situations with “red flags,” where a reasonable person would make further inquiry into

a problem V. Title Protection A. Title searches 1. A title search is an examination of public records that may affect a property’s title 2. A title search is usually performed by a title company employee, abstractor, or attorney B. Types of title protection 1. An abstract of title is a summary of all documents that may affect title to a property 2. An opinion of title or certificate of title presents a formal opinion, based on a title search, of who is the true

owner of a property and who else holds interests 3. Title insurance protects policy holders against title defects by reimbursing the policy holder for losses caused

by defects in title that aren’t excluded from coverage 4. Most transactions include two title insurance policies: an owner’s policy (for the benefit of the buyer) and a

lender’s policy (for the benefit of the lender) 5. There are two levels of coverage: standard coverage (which insures against latent defects in title) and

extended coverage (which also insures against matters not of public record, like encroachments and unrecorded mechanic’s liens)

6. The Torrens system is used in a few states, where a person who registers a document receives a certificate of title that provides definitive evidence of valid ownership

VI. Security Interests in Fixtures A. A security agreement may be used to create a security interest in real property; the creditor may then record a

financing statement B. If there is a security interest in personal property that becomes a fixture, if recorded the security interest will

survive even if ownership of the real property changes hands

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Lesson 5: Encumbrances I. Financial Encumbrances (Liens) A. An encumbrance is a non-possessory interest in real property held by someone other than the property owner B. A lien is a financial encumbrance, which gives a creditor the right to foreclose on the property if the property

owner doesn’t repay a debt 1. A lien may be voluntary (like a mortgage or deed of trust) or involuntary (like a tax lien or judgment lien) 2. A lien may be general (attaching to all property owned by the debtor) or specific (attaching to a particular

property) 3. A mortgage is created by a contract between a borrower (mortgagor) and lender (mortgagee) 4. A deed of trust is like a mortgage, but involves three parties: the borrower (trustor), the lender (beneficiary),

and an independent third party (trustee) 5. A mechanic’s lien can be filed against real property by a person who provides labor or materials for

improvement of that property 6. A judgment lien is attached to the property of a judgment debtor (the losing party in a lawsuit) 7. An attachment lien is filed against the property of a defendant in a civil suit prior to a judgment being issued 8. Property tax liens are attached to property until paid; special assessments may also be attached to pay for

specific improvements that benefit a property C. Lien priority 1. Liens with the highest priority are typically paid off first (“first in time, first in right”) 2. Exceptions: property tax liens always take first priority, and mechanic’s liens take priority based on the date

construction began, not the date they are recorded D. Homestead laws 1. Homestead laws offer protection against foreclosure on judgment liens 2. In most states, a certain amount of a property’s value is protected from judgment creditors II. Non-Financial Encumbrances A. Easements 1. An easement is the right to use another person’s land for a particular purpose; an easement holder has no

right to possess the property and no title to the land 2. An easement appurtenant burdens one parcel of land (the servient tenement) for the benefit of another

parcel of land (the dominant tenement) 3. Easements appurtenant run with the land, meaning they are transferred to a new owner if the dominant

tenement is sold 4. An easement in gross benefits a person (a dominant tenant) rather a parcel of land, and terminates on the

death of the easement holder 5. An easement may be created by express grant, express reservation, necessity, implication, prescription

(which is similar to adverse possession), dedication, or condemnation 6. An easement may be terminated by release, merger, failure of purpose, abandonment, or prescription B. A profit allows the holder to enter another person’s land, like an easement, but also remove something of value

such as timber or gravel C. A license is temporary permission to allow a person access to a property; unlike an easement, it is revocable and

does not run with the land D. An encroachment is a physical intrusion onto another person’s land, such as a misplaced fence; it is not an

encumbrance but can ripen into possession if ignored E. A nuisance is an activity or condition that interferes with a neighboring owner’s use and enjoyment of his

property, such as odors or noises F. Private restrictions 1. Private restrictions or restrictive covenants are restrictions on a property’s use imposed by a previous

owner, which run with the land 2. Most subdivision developers impose private restrictions, known as CC&Rs or a declaration of restrictions, on

lots before selling them 3. A restriction may be a covenant (a violation of which may lead to an injunction or an order to pay damages)

or a condition (a violation of which may result in the violator’s loss of title) 4. Restrictions may be considered terminated if the owners within a subdivision fail to enforce it, or if its purpose

can no longer be achieved because of changed circumstances

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Lesson 6: Public Restrictions on Land I. Land Use Controls A. Land use control laws are based on the government’s police power, which allows the state to adopt and enforce

laws needed to protect the public’s health, safety, morals, and general welfare B. Comprehensive planning 1. States typically require cities and counties to have planning commissions 2. The planning commission designs a long-term plan (master plan, comprehensive plan, or general plan) for

development in the city or county and all subsequent land use laws will conform to this plan C. Zoning 1. Zoning separates a community into specific uses such as residential, commercial, agricultural, and industrial;

incompatible uses are set apart with buffer zones 2. Enforcement is primarily through building permits 3. A non-conforming use may allow a use that does not conform to new zoning laws to continue, although it

cannot be rebuilt or expanded 4. A variance allows the building of a structure ordinarily prohibited by zoning laws, if the owner faces undue

hardship as a result of the zoning 5. A conditional use permit allows a use that is beneficial to the surrounding neighborhood but not allowed by

current zoning 6. A property owner who is unhappy with current zoning laws may petition the local zoning authority for a rezone 7. If there is conflict between zoning laws and private restrictions, whichever one is more restrictive will apply D. Building codes 1. Building codes protect the public from unsafe or unworkmanlike construction by requiring certain standards

for construction methods and materials 2. A property owner must receive a building permit before beginning work, and will receive a certificate of

occupancy once work is satisfactorily completed E. Subdivision regulations 1. Procedural laws in most cities and counties require subdividers to submit a preliminary plat map for approval

before construction begins 2. Some states have consumer protection laws that require subdividers to make disclosures to purchasers and

offer a right of rescission 3. The Interstate Land Sales Full Disclosure Act is a federal law that requires disclosures in sales of subdivided

property via interstate commerce F. Floodplain restrictions may restrict development in areas that are prone to flooding G. Environmental laws 1. The National Environmental Policy Act requires the preparation of an environmental impact statement prior

to governmental actions that would have a significant impact (including federal approval of private uses or developments)

2. CERCLA assigns liability for cleanup costs associated with contaminated property II. Eminent Domain A. The power of eminent domain allows the government to take private property for a public purpose, through the

condemnation process B. A property owner must receive just compensation for the taking of property III. Taxation A. General real estate taxes 1. General real estate taxes (or ad valorem taxes) are assessed annually on every property, based on the

value of the property, to pay for general governmental operations 2. A lien attaches when the taxes are levied; tax foreclosure occurs if the owner does not pay the taxes,

although the owner usually has the right to redeem the property by paying the taxes plus penalties and costs 3. Government property is exempt from taxation, as well as property used for religious, educational, or charitable

purposes B. Special assessments 1. Special assessments are one-time additional taxes levied on properties to pay for specific improvements

(such as paving or streetlights) 2. Only properties that benefit from the improvements are assessed, based on the amount of benefit the

property receives (such as by front footage) C. Conveyance taxes 1. In most states, a tax is levied on every sale of real property, usually paid by the seller prior to recording the

deed 2. This may be known as a conveyance tax, transfer tax, deed tax, or excise tax

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Lesson 7: Contract Law I. Legal Classifications of Contracts A. A contract is an agreement between two or more competent persons to do or not do certain things in exchange

for consideration B. An express contract is one that has been put into words (oral or written), while an implied contract is created by

the action of the parties C. A unilateral contract obligates only one of the contracting parties to perform, while a bilateral contract obligates

both parties to perform D. An executory contract is one that has not yet been performed, while an executed contract has been fully

performed II. Elements of a Valid Contract A. Capacity 1. A person must have reached the age of majority (usually 18) to enter into a contract; contracts signed by

minors are voidable (or in some states, void) 2. A person must be mentally competent to sign a contract; contracts by incompetent persons are void (or

voidable if temporarily incompetent) 3. Affairs of an incompetent person or a minor may be handled by parents or court-appointed guardians 4. A corporation may enter into a contract through an individual authorized by the board of directors 5. The partner of a general partnership has capacity to contract on behalf of the partnership B. Mutual consent 1. Mutual consent requires both offer and acceptance 2. An offer must express a willingness to contract and be definite and certain in its terms 3. An offer may be terminated prior to its acceptance through revocation by the offeror, lapse of time, death or

incompetence of the offeror, rejection of the offer, or a counteroffer 4. Acceptance can be made at any point before the termination of the offer, and must be communicated in the

manner stated in the offer 5. An acceptance must be free of negative influences such as fraud, mistake, undue influence, or duress; if not,

the contract is voidable by the injured party 6. Fraud may be either actual fraud (a false statement made with intent to deceive) or constructive fraud (a

false statement with no intent to deceive) 7. A mistake occurs when parties are mistaken as to a material fact or contract terms 8. Undue influence is taking advantage of a person’s distress or weakness to induce him to enter into a

contract 9. Duress involves compelling someone to enter into a contract through use or threat of force or constraint C. A contract must have a lawful objective; if not, it is void D. A contract must include consideration (money, goods, services, or a promise to provide money, good, or

services) E. Many contracts must be in writing, according to each state’s statute of frauds 1. Almost all contracts used in a real estate transaction are required to be in writing 2. Parol evidence (oral statements or other extraneous evidence) is considered in disputes over a contract only

if the written agreement is incomplete or ambiguous III. Legal Status of Contracts A. A void contract has no legal effect, such as when one essential element is lacking B. A voidable contract may be voided by the injured party 1. The injured party must take action within a reasonable time to terminate the contract, or it may be considered

ratified 2. The injured party may also choose to go through with the contract C. A contract may be unenforceable if its contents cannot be proved (as with an oral contract), if one party has a

voidable contract, or if the statute of limitations has expired D. A valid contract has all essential elements, is free of negative influences, and can be proven in court IV. Discharging a Contract A. Most contracts are discharged through full performance by both parties B. Agreement between parties 1. A contract may be discharged through rescission if the parties sign an agreement that terminates their

agreement in a way that puts them back in the positions they were in before entering the initial contract 2. A contract may be discharged through cancellation, where a contract is terminated without undoing previous

acts

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3. A contract may be assigned, where one party’s interests are transferred to another person; the new party (assignee) assumes primary liability for the contractual obligations, but the withdrawing party (assignor) remains secondarily liable

4. A novation may be the substitution of a new party into an existing agreement, or the substitution of a new agreement for an old agreement

C. A court may terminate a contract based on substantial performance, impossibility, or operation of law V. Breach of Contract A. An injured party may seek a remedy in court only if there is a material breach B. A rescission of a contract may be ordered by a court at the request of one party when the other party has

breached the contract C. Liquidated damages are a remedy where a breaching party must pay an amount specified in advance in the

contract to the injured party D. Damages may be paid to the injured party to restore her to the position she would have been in, had the

breaching party fulfilled the contract terms E. Specific performance is a court order that compels a breaching party to complete a transaction (used only

monetary damages are an inadequate remedy) VI. Tender A. A tender is an unconditional offer by one party to perform his part of the agreement; it is necessary before that

party can take legal action for a breach of contract B. If the breaching party makes an anticipatory repudiation, tender is not necessary before starting a legal action

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Lesson 8: Types of Real Estate Contracts I. Listing Agreements A. Earning a commission 1. A listing agreement is a written employment contract between a seller and a broker; in most states, a broker

cannot sue to collect a commission without a written listing agreement 2. To earn a commission the listing broker must locate a ready, willing, and able buyer during the listing period 3. A buyer is “ready and willing” if he makes an offer that meet the seller’s terms, and “able” if he has contractual

capacity and the financial ability to make the purchase 4. In most states, the broker will receive the commission if a ready, willing, and able buyer is found, even if the

transaction doesn’t close (if the seller has a change of heart or is unable to deliver marketable title) 5. With an open listing, a seller is responsible for a commission only if the broker was the procuring cause of

the sale; a seller may take out multiple open listings with multiple brokers 6. With an exclusive agency listing, a seller lists with only one broker, and is responsible for a commission if

the property sells during the listing period, unless the seller sells the property herself 7. With an exclusive right to sell listing, a seller lists with only one broker and is responsible for a commission

if the property sells during the listing period, regardless of who make the sale B. Elements of a listing agreement 1. A listing agreement must identify the property, set acceptable terms of the sale, grant the broker authority,

and determine the broker’s compensation 2. In a net listing, the commission is not based on a percentage of the sales price, but rather the broker

receives everything over a required net amount; these are illegal in many states 3. The listing should give a termination date; many states require listings to have a termination date II. Purchase Agreements A. Typical provisions 1. A purchase agreement is a written contract between a buyer and seller that establishes the terms of the sale 2. Usually the buyer will present a written offer to the seller along with an earnest money deposit; if the seller

accepts the offer, she signs the form, creating a binding contract of sale 3. A purchase agreement must identify the parties, describe the property, sets forth the price and method of

payment, and sets the date for closing the transaction 4. Everyone with an ownership interest must sign the contract; it is best for both spouses to sign the contract 5. A contingency clause makes the contract conditional on something else happening, like the buyer receiving

financing 6. A contract may contain a time is of the essence clause, which makes any failure to meet a deadline a

breach of contract 7. A good faith deposit is typically given to the seller by the buyer, which is often treated as liquidated

damages in the event of the buyer’s default B. In some states, a binder (a temporary contract between the parties) takes the place of a purchase agreement

until a formal agreement can be drafted by an attorney C. An amendment is a written modification made after the contract has been signed, while an addendum is an

attachment to the contract made prior to signing D. The parties will usually also enter into a separate contract called an escrow agreement that provides instructions

for the closing process III. Land Contracts A. Rights and responsibilities of parties 1. The parties to a land contract (which is most often used in seller-financed transactions) are the vendor

(seller) and vendee (buyer) 2. The buyer takes possession immediately and pays the seller in installments, but does not receive title until the

purchase price has been paid off 3. The seller retains legal title to the property, while the buyer has equitable title to the property during the

contract period 4. The seller and buyer both may encumber their interests during the contract period, but lenders are unlikely to

accept that as security B. Remedies for default 1. If the seller fails to transfer legal title after the purchase price is paid, the buyer may sue for breach of contract 2. If the buyer defaults; the seller may retake possession of the property 3. Traditionally, the seller could keep all the payments, but most states require the seller to return the buyer’s

payments, less damages and fair market rent for the period of possession

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IV. Leases A. Requirements for a valid lease 1. A lease is a contract between a landlord and tenant that conveys a leasehold interest 2. The parties to the lease must be competent, mutually agree to its terms, and offer consideration (such as

rent) 3. A lease for more than one year, in most states, must be in writing and signed by the landlord B. Most leases allow the tenant to renew the lease at the end of the term; a lease may also be renewed by

implication, if a landlord keeps accepting payments C. Transferring leased property 1. In an assignment, a tenant transfers the entire unexpired term of the lease, who becomes primarily liable for

the rent (the original tenant is secondarily liable) 2. In a sublease, a tenant transfers the leasehold for only a portion of the remaining lease term; the subtenant

pays rent to the tenant, who pays the landlord 3. A novation occurs when an existing lease is replaced by a new lease, or one party to a lease is replaced by a

new party D. Termination of a lease 1. A lease may terminate by surrender if the landlord and tenant mutually agree to terminate it 2. If the landlord expels the tenant from the property, it is known as actual eviction; the landlord must follow

proper court procedures to do so 3. If a landlord interferes with the tenant’s possession of the property, the tenant may be justified in terminating

the lease; this is known as constructive eviction 4. A lease terminates if the tenant uses the property is a manner not authorized by law or the lease terms 5. A lease may be terminated if the premises are destroyed (although if the lease includes land, the lease may

not terminate) V. Option Agreements A. Requirements for a valid option 1. An option agreement is a contract to keep an offer open, giving a person a right to buy at a specific price

during a specific period of time 2. The parties to the agreement are the optionor (the seller, who grants the option right) and the optionee (the

buyer, who receives the right to buy) 3. The optionee is not bound to exercise the option, but the optionor must keep the offer open during the

specified time, and must go through with the sale if the optionee exercises the option 4. An option agreement must include consideration and must be in writing B. An option does not create an interest in property, although it can be assigned to another party C. An option can be recorded to give notice; an unrecorded option can create a cloud on title D. A right of first refusal gives the holder the first opportunity to purchase property when if it becomes available,

but is otherwise not binding on the property owner

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Lesson 9: Real Estate Agency Law I. Introduction to Agency A. The agency relationship 1. An agent represents a principal in dealings with third parties 2. The most common agency relationship in real estate is between the seller and the listing broker; many buyers

form a relationship with a buyer’s broker B. Agency law 1. General agency law applies to agency relationships in and out of the real estate context 2. Some states also have real estate agency statutes that define and regulate relationships between brokers,

salespersons, and clients II. Creating an Agency Relationship A. Most agencies are created through express agreement, when a principal expressly appoints an agent (usually in

writing, sometimes oral) B. An agency is created through ratification if an agent acts without authorization but the principal gives approval

after the fact C. Under the doctrine of estoppel, an agency is created if it would be unfair to a third party for a principal to deny an

agent’s authority D. An agency is created through implication if a person behaves toward another in a way that suggests he is acting

as that person’s agent III. Legal Effects of Agency A. Scope of authority 1. A universal agent is authorized to do anything that can be lawfully delegated 2. A general agent is authorized to handle all of a principal’s affairs in one or more specified areas 3. A special agent has authority to do a specific thing or conduct a specific transaction B. Actual vs. apparent authority 1. Actual authority is authority granted to the agent by the principal, either expressly or by implication 2. A person has apparent authority (or ostensible authority) when he has no authority, but a principal allows it

to appear the person’s actions are authorized C. Under the doctrine of vicarious liability, a principal may be held liable for an agent’s negligent or wrongful acts D. Under the doctrine of imputed knowledge, a principal is considered to have notice of information that the agent

has, even if the agent never actually tells the principal IV. Duties in an Agency Relationship A. Agent’s duties to principal 1. An agency relationship is a fiduciary relationship, placing the agent in a position of trust and confidence 2. An agent owes the principal the duties of reasonable care and skill, obedience and utmost good faith,

accounting, loyalty, and disclosure of material facts 3. The duty of loyalty includes the duties to not reveal confidential information and to not make a secret profit

from the agency 4. Material facts must be disclosed; for a seller, this includes all offers, the true value of the property, and any

relationship with a buyer B. Agent’s duties to third parties 1. An agent owes third parties two basic duties: reasonable care and skill, and good faith and fair dealing 2. Good faith means avoiding misrepresentations (opinions, predictions, and puffing are not considered

misrepresentations) 3. The seller and seller’s agent must disclose latent defects (hidden defects not discoverable by ordinary

inspection) to prospective buyers 4. In some states, an agent has the duty to conduct a visual inspection of the property 5. Some states have passed laws specifying that certain facts that might stigmatize a property are not material

and do not need to be disclosed (such as the property was site of a crime or death) 6. Many states require the seller in a residential transaction to complete a seller disclosure statement disclosing

any known defects with the property C. Breach of duty 1. A broker who breaches any duties to a principal or third party may be liable for compensatory damages 2. A principal may also be liable, if in a state where vicarious liability is allowed; however, the principal may then

sue the broker for damages

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V. Terminating an Agency A. Termination by acts of the parties 1. An agency may be terminated by mutual agreement by the parties 2. A principal may terminate an agency by revocation (unless it is an agency coupled with an interest) 3. An agent may terminate an agency by renunciation B. Termination by operation of law 1. An agency terminates at the expiration of the agency term 2. An agency terminates upon fulfillment of its purpose 3. An agency terminates upon death or incapacity of either party 4. An agency terminates upon extinction of the subject matter (such as destruction of the property) VI. Real Estate Agency Relationships A. Historical perspective 1. Listing agreements used to contain a unilateral offer of subagency, which stated that any MLS member

who found a buyer for a property automatically represented the seller 2. The result of this clause often was inadvertent dual agency, where an agent representing a seller formed an

agency by implication with the buyer as well 3. More recently, listing agreements have used a cooperation and compensation clause, stating that an agent

decides whether she represents the seller or buyer in a transaction B. Types of agency relationships 1. Seller agency is created through a listing agreement; a seller’s agent may provide some services to a buyer

without creating a buyer agency 2. Buyer agency is usually created through a buyer agency agreement 3. Advantages of buyer agency include confidentiality and loyalty, objective advice, help with negotiations, and

access to more homes 4. A buyer’s agent is usually compensated through a split of the seller-paid commission, but it may also be

compensated by through a retainer or a buyer-paid fee 5. Dual agency occurs when one agent represents both parties, which is usually allowed only through the

consent of both parties 6. Dual agency most often arises in in-house transactions, where each party is represented by a salesperson,

both of whom work for the same broker (in which case it may be known as designated agency) 7. Non-agency is allowed in some states, where a person may act as a facilitator without owing either party

fiduciary duties VII. Agency Disclosure Requirements - All states require agents to make an agency disclosure, such as disclosing to each party which party the agent represents

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Lesson 10: Regulation of the Real Estate Profession I. Real Estate Licensing A. Governments use licensing to make sure that licensees meet basic standards of education and competence B. Administration of real estate license laws 1. Each state has enacted statutes for licensing of real estate agents and regulation of their activities; each state

has an agency for this purpose 2. Each state’s agency is headed by a director or commissioner, who has the authority to adopt regulations,

screen license applicants, investigate complaints, and hold disciplinary hearings C. When a real estate license is required 1. A license is generally required when selling, buying, or exchanging real estate, negotiating a real estate

transaction, or listing or advertising real estate for sale 2. A license is required only when these activities are performed on behalf of another person, and in expectation

of compensation 3. Many exemptions exist, such as for attorneys, corporate officers, and persons acting under a power of

attorney or court order 4. Unlicensed real estate assistants are allowed in some states to assist real estate agents with their work, but

the tasks they can perform are limited D. Types of licenses 1. A broker’s license authorizes the licensee to engage in any activities for which a real estate license is

required 2. A broker’s license may be issued to a person or corporation (which would require naming a designated

broker) 3. A broker may choose to work for another broker instead of operating her own brokerage; this is known as an

associate broker 4. A salesperson’s license authorizes the licensee to engage in real estate activities under the supervision of a

licensed broker, rather than directly for a principal E. Qualifications for a license 1. Typical requirements for a license are that an applicant must be 18 or 19 years old, have completed a basic

real estate course, and passed a state exam 2. Broker applicants must have typically taken additional course work and worked for a number of years as a

salesperson F. License renewal 1. A license may need to be renewed annually or once every few years; most states have a continuing

education requirement for renewal 2. A person whose license has expired may no longer legally practice real estate, although late renewal is

usually allowed within a certain period if a penalty fee is paid G. Disciplinary action 1. The director will investigate upon a complaint about a real estate licensee, and will prepare charges if the

investigation shows a violation of license law may have occurred 2. A disciplinary hearing is held by an administrative law judge, who will decide if a violation occurred 3. The director will decide what punishment to impose, such as license suspension or revocation, or a fine; his

decision usually may be appealed to a county court 4. Grounds for disciplinary action may include misrepresentation, fraud, dishonest dealing, commingling,

negligence, failure to supervise affiliated licensees, undisclosed dual agency, making a secret profit, and failure to disclose material facts

5. Many states have recovery funds, which will pay an injured party who wins a court verdict against a licensee who does not have the funds to pay the judgment (the licensee must then repay the funds to have his license reinstated)

II. Broker/Salesperson Relationship A. Affiliation with broker 1. A salesperson must affiliate with a broker to engage in activities that require a license 2. Many states require a written employment agreement between broker and salesperson B. Brokers have supervisory responsibilities over salespersons and may be face discipline for failure to supervise as

well as civil liability for a salesperson’s misconduct C. A relationship between broker and salesperson can be terminated at any time by either party

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III. Regulation of Business Practices A. Brokerage offices 1. A real estate broker generally must maintain an office in the state where she is licensed 2. Brokers may be able to obtain a license under a fictitious business name 3. Dual-state brokers may be excepted from rules concerning maintaining an office B. A licensee is responsible for such elements of a transaction as negotiations, giving copies of all documents, and

expeditious performance C. A broker must keep copies of all documents connected with a transaction for a period of time required by state

law D. Trust funds 1. Trust funds consist of money temporarily entrusted to a broker by clients or customers, such as good faith

deposits and security deposits 2. A broker may not commingle funds by mixing trust funds with general business funds 3. In most states, a broker must maintain a trust account for holding trust funds; the state will have requirements,

such as whose name the account must be in and whether the account may be interest-bearing 4. Typically, a broker who receives trust funds must either deliver them directly to a principal, turn them over to

an escrow agent, or deposit them into his trust account 5. In some states, the buyer’s deposit check may be held uncashed until the buyer’s offer is accepted or rejected 6. If ownership of trust funds becomes unclear, the agent may file an interpleader action, where a court will

decide who is the rightful owner of funds E. Advertising and promotions 1. Many states prohibit blind ads, which do not include the name of the broker who employs the licensee who

placed the ad 2. Some states place limits on Internet advertising, such as allowing only licensees to respond to online inquiries

from customers IV. Antitrust Laws and Real Estate Licensees A. The Sherman Act is the main federal antitrust law, which prohibits conspiracies between two or more businesses

that have the effect of restraining trade B. The Act prohibits price fixing, which occurs when competing firms conspire to set prices or price ranges (such as

commission rates) C. The Act prohibits group boycotts, where two people agree to exclude a competitor from fair participation in the

market D. The Act prohibits tie-in arrangements, where an agreement to sell one product is conditioned on the purchase of

another product (such as list-back agreements)

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Lesson 11: Principles of Real Estate Financing I. Economics of Real Estate Finance A. Real estate cycles 1. Periodic shifts in activity in the real estate market are called real estate cycles 2. In a buyer’s market, supply of houses exceeds demand, so prices may fall; in a seller’s market, demand of

houses exceeds supply, so prices rise, stimulating more production 3. Interest rates also fluctuate in response to supply and demand; if funds are scarce, interest rates are high,

known as a tight money market B. Interest rates and federal policy 1. Fiscal policy is how the federal government manages its budget (taking in revenue, making expenditures,

and creating debt) 2. Monetary policy is control by the Federal Reserve over the money supply and interest rates 3. Three tools the Fed uses to implement monetary policy are setting key interest rates, setting reserve

requirements, and engaging in open market operations II. Real Estate Finance Markets A. Primary market 1. The primary market is where mortgage lenders make loans to home buyers 2. The primary market was originally only local; now many home buyers work with nationwide banks or

mortgage companies B. Secondary market 1. The secondary market is where government agencies and private investors buy and sell mortgages secured

by real estate in all parts of the country 2. The secondary market stabilizes local mortgage markets, by allowing local lenders to raise more funds by

liquidating loans on a nationwide market 3. The secondary market agencies buy large numbers of loans from primary market lenders and then sell

mortgage-backed securities to private investors 4. The secondary market agencies minimize the risk of default by insisting on uniform underwriting standards;

most loans made in the U.S. conform to these standards 5. Fannie Mae (the FNMA) started out as a federal agency and a secondary market for FHA loans; it is now a

government-chartered private corporation and purchases conventional and VA loans as well 6. Freddie Mac (the FHMLC) is a government-chartered private corporation that purchases conventional, FHA,

and VA loans 7. Ginnie Mae (the GNMA) is a federal agency that purchases FHA and VA loans III. Real Estate Finance Documents A. Promissory notes 1. A promissory note is a written promise to repay a debt; it is a contract between a borrower (the maker) and

a lender (the payee) 2. A promissory note must state the loan amount (the principal), the amount of payments, when and how

payments are to be made, and when the loan will be repaid in full 3. A straight note is interest-only, with the full loan amount due at the loan term’s end 4. An installment note includes principal as well as interest in its payments; a fully amortized loan will be

entirely paid off at the loan term’s end 5. Most promissory notes are negotiable instruments, which allow the lender to assign the debt to someone

else by endorsing the note B. Security instruments 1. A security instrument makes real property collateral for a loan, creating a lien against the property and

allowing the lender to foreclose in the event of default 2. In title theory states, a mortgage actually transfers title to the lender; in lien theory states, a mortgage only

creates a lien against the property 3. In a mortgage, there are two parties: the mortgagor (the borrower) and the mortgagee (the lender) 4. In a deed of trust, there are three parties: the trustor (the borrower), the beneficiary (the lender), and the

trustee (a neutral third party who handles foreclosure) C. Finance document provisions 1. A mortgaging clause or granting clause indicates that a property is promised as security for a loan 2. An acceleration clause states that if the borrower defaults, the lender has the right to declare the entire loan

balance due immediately (calling the loan) 3. An alienation clause gives the lender the right to accelerate the loan if the borrower sells the property or an

interest in it

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4. A prepayment penalty may be imposed if the borrower pays more than a certain amount of principal in advance; most home loans do not contain such penalties

5. A subordination clause allows a instrument recorded later (such as a construction loan) to take priority over an earlier loan

6. A defeasance clause states that when the debt has been paid, the lien will be released from the borrower’s property

D. Foreclosure 1. Judicial foreclosure is carried out through the court system; a lender files a lawsuit against the borrower in

the county where the property is located 2. The judge will issue a decree of foreclosure and order the property to be sold in a sheriff’s sale 3. Some states allow the borrower a reinstatement period where he can cure the default by paying back the

late payments plus costs and fees 4. Some states also allow the borrower a redemption period where foreclosure can be stopped by paying off

the entire loan balance plus costs and fees; in some cases, this right may extend for a period after the sale 5. In some states, if the sale proceeds aren’t adequate to pay the debt owed to the foreclosing lender, the lender

may sue for a deficiency judgment 6. Non-judicial foreclosure is carried out by a trustee; it is limited to deeds of trust or mortgages that contain a

power of sale clause 7. The trustee will sell the property through a trustee’s sale; it is not necessary to file a foreclosure lawsuit or

get a court order 8. The trustee will need to comply with notice requirements, such as sending and recording a notice of default

and notice of sale 9. The borrower generally has the right to reinstate or redeem the loan prior to the sale; unlike with a mortgage,

though, there is no post-sale right of redemption 10. Lenders generally prefer non-judicial foreclosure because it is faster and less expensive IV. Seller Financing A. Some transactions are financed by the seller rather than an institutional lender, often on more favorable terms B. The seller may use a purchase money loan (secured by a mortgage or deed of trust) or a land contract (where the

buyer pays off the property in installments) V. Types of Mortgage Loans A. A first mortgage, or senior mortgage, has highest lien position B. A purchase money mortgage may mean either any loan where the borrower receives money to buy property (a

hard money mortgage), or a loan in a seller-financed transaction (a soft money mortgage) C. A swing loan is used by a buyer to purchase a property before selling a current home D. A budget mortgage includes not just principal and interest, but also taxes and insurance E. A package mortgage is secured by personal property as well as real property F. A construction mortgage is a short-term loan used to construct improvements on the land, which is then

replaced by a permanent take-out loan G. A blanket mortgage is secured by multiple parcels of real property, often in new subdivisions H. A participation mortgage allows a lender to receive share of the earnings from the mortgaged property, as well

as interest payments I. A wraparound mortgage is used in seller-financed transactions to include an existing first mortgage on the

property J. An open-end mortgage allows a borrower to re-borrow any part of the debt that has been repaid K. A reverse equity mortgage provides income to older homeowners, who receive a monthly check from the lender

(usually requiring the property to be sold on the borrower’s death to repay the loan)

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Lesson 12: Applying for a Mortgage Loan I. Choosing a Lender A. Types of mortgage lenders 1. Savings and loans tend to focus on home mortgage loans and long-term deposits; until recently, they

dominated the residential mortgage market 2. Commercial banks are primarily oriented toward business ventures and construction loans, but have

increasingly moved into residential loans 3. Savings banks were often owned by and operated for their depositors, and made residential loans in the

local community 4. Credit unions are depository institutions that usually serve only members of a particular group, like a

professional organization 5. Mortgage companies are the largest force in residential lending now; they act as loan correspondents:

intermediaries between large investors and buyers needing financing B. Loan costs 1. A point is one percentage point of the loan amount; this can refer to origination fees as well as discount

points 2. An origination fee covers the administrative costs of processing a loan, and is charged in almost every

transaction 3. Discount points are charged to increase a lender’s yield (or profit); the lender will usually offer a lower

interest rate in exchange 4. A borrower may pay a lock-in fee to lock in an interest rate rather than letting it float until closing C. Truth in Lending Act 1. TILA requires lender to disclose the complete cost of credit to loan applicants 2. TILA covers loans for personal, family, or household purposes that either $25,000 or less, or secured by real

property 3. TILA requires disclosure of the total finance charge (sum of all fees and charges) and annual percentage

rate (total cost of the loan as an annual percentage of the loan amount) 4. TILA requires disclosure of all loan terms in an advertisement, if the ad contains any trigger terms (such as

the down payment or interest rate) II. Loan Application and Underwriting A. Most buyers go through the preapproval process, where they submit a loan application and receive a maximum

loan amount before beginning to house-hunt B. A real estate agent may help a buyer apply for financing using a computerized loan origination system C. The application form asks the buyer to document personal information, current housing expenses, employment,

income, and assets and liabilities D. Underwriting the loan 1. The lender will qualify the borrower based on her income, net worth, and credit history 2. Income that meets tests of quality and durability is known as stable monthly income 3. An underwriter will use two income ratios: a housing expense to income ratio, and a debt to income ratio 4. The lender will also qualify the property, based on an appraiser’s estimate of its value E. Buyers who don’t meet standard underwriting requirements may opt for a subprime loan, which will typically

charge a higher interest rate to compensate for the added risk III. Basic Loan Features A. Loan term 1. Most loans are repaid over a 30-year period, which features affordable payments 2. 15-year loans are also common, which offer substantial savings over the long run B. Amortization 1. Most loans are fully amortized, meaning they include interest and principal in each payment and will be fully

repaid by loan’s end 2. Partially amortized loans include interest and principal in each payment but still require a balloon payment 3. An interest-only loan’s payments only cover interest, and the borrower will repay the entire principal at the

loan term’s end C. Loan-to-value ratio 1. The LTV represents the relationship between the loan amount and the value of the property, as a percentage 2. LTV is used to set maximum loan amounts, as the higher the LTV, the greater the lender’s risk D. A borrower may obtain secondary financing, such as a primary loan from an institutional lender and a

supplemental loan from the seller

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E. Fixed and adjustable interest rates 1. A fixed-rate loan has an interest rate that remains unchanged over the loan’s term 2. An adjustable rate mortgage (ARM) permits the lender to periodically adjust the loan’s interest rate to reflect

changes in the cost of money 3. An ARM is based on an index, which is a published rate that indicates the cost of money 4. The index plus the margin (which covers the lender’s administrative expenses and profit) equals the interest

rate charged to an ARM borrower 5. An ARM has an adjustment period, which determines how often the rate is adjusted; most ARMs impose caps

on how high the rate can adjust IV. Residential Financing Programs A. Conventional loans 1. Conventional loans are any institutional loan not insured by the FHA or guaranteed by the VA 2. Most conventional loans meet Fannie Mae underwriting requirements and can be sold on the secondary

market; those that don’t are nonconforming loans 3. The standard LTV for conventional loans has been 80% of the property’s appraised value, as this is involves

an acceptable level of risk for lenders 4. LTVs of 90%, 95%, or more are often allowed; a higher interest rate may be charged, and private mortgage

insurance (PMI) is required to reduce the risk B. FHA-insured loans 1. The FHA insures loans through its Mutual Mortgage Insurance Plan, to protect lenders from risks associated

with loans to buyers with less income 2. A borrower would approach a lender to originate an FHA loan, rather than approach the FHA 3. FHA loans have easier qualifying standards (requiring a lower income ratio) and require smaller down

payments than conventional loans 4. FHA loans are subject to maximum loan amounts, varying from region to region depending on housing costs C. VA-guaranteed loans 1. The VA guarantees loans to eligible veterans, to protect lenders from risks associated with loans to buyers

with less income 2. Eligibility depends on when and for how long a veteran served; an eligible veteran will receive a Certificate of

Eligibility 3. VA loans do not require a down payment, and there is no maximum loan amount 4. VA underwriting standards are less stringent than either conventional or FHA loans 5. The amount of VA guaranty (which affects the size of the loan a lender will make) available to a particular

veteran is known as his entitlement V. Predatory Lending A. Many states ban practices by unscrupulous lenders designed to take advantage of unsophisticated borrowers B. Predatory practices include predatory steering, fee packing, loan flipping, equity stripping, property flipping, and

disregarding a buyer’s ability to pay C. The Home Ownership and Equity Protection Act is a federal law that places restrictions on high-cost home equity

loans

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Lesson 13: Real Estate Appraisal I. Introduction to Appraisal A. Purpose and function of appraisal 1. An appraisal is an estimate or opinion of value, sometimes called a valuation 2. The purpose of an appraisal is to estimate its market value as of a certain date 3. The function of an appraisal is why it is being made, such as to help a lender decide if a property is adequate

security B. Appraiser-client relationship 1. An appraiser may be employed by a lender or government agency, or may be self-employed and appraise

properties for a fee (a fee appraiser) 2. An appraiser and client have a fiduciary relationship, which includes the duty of confidentiality C. Licensing and certification of appraisers - Federal law requires appraisals in federally-related loan transactions to

be performed by state-licensed or state-certified appraisers II. Value A. Types of value 1. For a property to have value it must have four characteristics: utility, scarcity, demand, and transferability 2. Market value is the value of a property as determined by the open market; it is the most probable price that

the property should bring 3. Value in use is the subjective value placed on a property by a particular person B. Principles of value 1. Forces that interact to create property values include social ideal and standards, economic fluctuations,

government regulations, and physical and environmental factors 2. The principle of highest and best use refers to the use that will provide the greatest net return over time 3. The principle of change states that real estate values are constantly in flux, which is why an appraisal is only

valid for one particular date 4. The principle of anticipation states that value is created by the anticipated future benefits of owning a

property 5. The principle of substitution states that a property’s value is limited by what a buyer would have to pay for

an equally desirable substitute property 6. The principle of conformity states that value is maximized when there is a reasonable degree of social and

economic conformity within a neighborhood 7. The principle of contribution states that the value of an improvement adds to the overall value of a property III. The Appraisal Process - The steps in the appraisal process are: A. Define the problem B. Determine what data is needed and where it can be found C. Gather and verify the general data (concerning matters outside the subject property, like neighborhood data) D. Gather and verify the specific data (concerning the land and the improvements) E. Select and apply the valuation methods F. Reconcile value indicators for the final value estimate G. Issue appraisal report IV. Gathering Data A. General data 1. An appraiser needs to examine economic trends at both a national and local level 2. Neighborhood analysis includes factors such as percentage of home ownership, vacancies, conformity,

changing land uses, streets, utilities, nuisance, prestige, proximity to amenities, and schools and public services

B. Specific data 1. Site analysis includes the width, frontage, area, and depth of the lot, as well as its shape and topography 2. Building analysis includes the age and condition of the house, its square footage, orientation, interior layout,

number of rooms, and energy efficiency V. Methods of Appraisal A. Sales comparison approach to value 1. The sales comparison approach is used primarily for residential property, by comparing the subject property

to similar properties that recently sold 2. Elements of comparison that determine whether a property is a comparable include date of comparable sale,

location of comparable sale, physical characteristics, terms of sale, and whether it was an arm’s length transaction

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3. Comparable sales older than six months require an adjustment to reflect inflationary forces; comparables older than one year should not be used

4. An arm’s length transaction is one where buyer and seller were informed of the property’s attributes, were acting free of unusual pressure, and the property was on the open market for a reasonable period of time

5. The selling price of each comparable is adjusted to account for differences between it and the subject property

B. Cost approach to value 1. There are three steps to the cost approach: estimating the cost of replacing the improvements, estimating

and deducting depreciation, and adding the value of the lot 2. Replacement cost is the cost of constructing a building with equivalent utility to the existing building using

current materials and methods 3. Reproduction cost is the cost of constructing an exact replica of an existing building 4. Replacement cost may be estimated using the square foot method, unit-in-place method, or quantity survey

method 5. Depreciation is loss in value due to any cause; any house that isn’t new has depreciated 6. Deferred maintenance is any physical deterioration or structural defects 7. Functional obsolescence is a loss in value due to a poor floor plan, unappealing design, or outdated fixtures 8. External obsolescence refers to depreciation caused by factors external to the property, such as zoning

changes, nearby nuisances, or a declining neighborhood 9. Methods of estimating depreciation include the capitalization method, the market data method, the straight-

line method, and the engineering method C. Income approach to value 1. The income approach bases a property’s present value on its future income 2. The property’s economic rent (what it would earn on the open market, instead of what it earns now) is also

called its potential gross income 3. The property’s effective gross income is determined by subtracting a bad debt and vacancy factor from

the potential gross income 4. The property’s net income is determined by subtracting operating expenses (fixed expenses, maintenance

expenses, and reserves for replacement) from effective gross income 5. The annual net income is divided by a capitalization rate to find the property’s value 6. The capitalization rate is selected to reflect the rate of return an investor would want to receive on the money

invested in the property 7. Methods of selecting a capitalization rate include the direct comparison method, the band of investment

method, and the summation method 8. The gross multiplier method is a simplified version of the income approach used to find the value of single-

family residential rentals D. Site valuation 1. An appraiser may need to find the value of a vacant lot, or the value of a developed lot as part of the cost

approach 2. Site valuation methods include the sales comparison method, the land residual technique, the distribution

method, and the development method VI. Reconciliation and Final Estimate of Value A. Reconciliation is the subjective process of arriving at a final estimate of a property’s value by considering the

results of various approaches to value B. An appraisal report contains the estimate of value and presents the evidence; it may be a narrative report, a form

report, or a letter report VII. Competitive Market Analysis A. A real estate agent may perform a competitive market analysis (CMA) using techniques similar to the sales

comparison approach to value B. The steps in a CMA include: 1. Collecting and analyzing information about the seller’s property 2. Choosing comparable properties 3. Comparing the seller’s property to comparables and adjusting comparable sales prices 4. Estimating the value of the seller’s property

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Lesson 14: Closing Real Estate Transactions I. Closing and Escrow A. The closing or settlement process finalizes a real estate transaction B. In face-to-face closing, the seller, buyer, and other parties (such as the lender) meet in person to exchange the

deed for the purchase price C. In the escrow process, the buyer and seller give money and documents to a neutral third party (an escrow

agent) to hold until closing 1. The escrow agent is a dual agent with fiduciary duties to both parties 2. The escrow agent follows written escrow instructions from both parties D. Steps that must be taken as part of an escrow include obtaining a title report, paying of existing loans, preparing a

deed, depositing funds, requesting funding of the buyer’s loan, allocating closing costs, preparing settlement statements, and recording documents

E. Escrow terminates when the transaction closes 1. It also closes if the terms have not been fulfilled by the closing date 2. If there is a dispute over funds, the escrow agent may deposit the funds with the court and file an

interpleader action, where the court will decide the rightful owner F. An escrow agent may be an independent escrow company, an attorney, a title company, or an escrow

department of an institutional lender. Real estate brokers may offer escrow services, although most states limit when they can (for instance, not in their own transactions)

II. Closing Costs and Settlement Statements A. Closing costs are detailed on a form called a settlement statement B. The settlement statement lists all debits and credits for both parties 1. A debit is payable by a party, while a credit is payable to a party 2. Some expenses (like appraisal or title insurance) are allocated by custom, but the parties may agree to

allocate them differently C. Guide to settlement statement 1. Debits to the buyer may include the purchase price, lender’s title insurance, origination fees, property taxes

paid in advance, hazard insurance, prepaid loan interest, an appraisal, and recording and escrow fees 2. Credits to the buyer include the good faith deposit and the new loan balance 3. Debits to the seller include excise tax, the sales commission, payoff of the existing loan, owner’s title

insurance, loan interest in arrears, and recording and escrow fees 4. Credits to the seller include the purchase price, property taxes paid in advance, and the balance of the seller’s

reserve account 5. The settlement statement will conclude with the balance due from the buyer, and the balance due to the seller D. Prorations 1. Periodic expenses such as property taxes, mortgage interest, and hazard insurance may need to be prorated

(allocated proportionately between buyer and seller) 2. The steps in proration are to determine the per diem rate, determine the number of days each party is

responsible for, and multiply the number of days by the per diem rate III. Income Tax Aspects of Closing A. An escrow agent must report the gross proceeds of every sale to the Internal Revenue Service using a 1099-S

form B. The Foreign Investment in Real Property Tax Act (FIRPTA) requires a buyer to forward 10% of the net

proceeds from a sale of property by a non-citizen to the Internal Revenue Service in some cases IV. Real Estate Settlement Procedures Act A. The Real Estate Settlement Procedures Act (RESPA) has the goals of providing borrowers with information about

the cost of closing services, and eliminating kickbacks and referral fees associated with settlement B. Transactions covered by RESPA 1. RESPA applies to federally-related loan transactions (almost all residential loans made by institutional

lenders) 2. RESPA does not apply to loans to purchase 25 acres or more, business or agricultural loans, vacant land

purchases, temporary financing like construction loans, or assumptions for which the lender’s approval is not needed

C. RESPA requirements 1. The lender has three days to give all applicants a copy of a booklet about settlement procedures prepared by

HUD, a good faith estimate of closing costs, and a mortgage servicing disclosure statement 2. The closing agent must prepare a Uniform Settlement Statement (which must be provided on or before the

closing date)

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3. The lender cannot require excessive deposits into an escrow account to cover recurring costs like taxes and insurance

4. A lender or provider of settlement services may not pay kickbacks or referral fees, accept unearned fees, or a charge a fee for preparing a Uniform Settlement Statement, escrow account statement, or TILA disclosure form

5. A seller may not require a lender to use a particular title company

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Lesson 15: Income Taxation and Real Estate I. Basic Taxation Concepts A. Federal income tax is a progressive tax, meaning that the more a taxpayer earns in a year, the higher his tax

rate will be B. Income is any economic benefit realized by a taxpayer (unless specifically excluded) C. A deduction is subtracted from a taxpayer’s income before tax owed is calculated; a credit is subtracted directly

from the amount of tax owed D. Gains from the sale or exchange of an asset are treated as income, but in some cases losses may be deducted

from income; losses on the sale of a principal residence may not be deducted E. A taxpayer’s basis in a property is her investment in it; adjusted basis is the acquisition cost plus capital

expenditures (minus, for some properties, depreciation deductions) F. A gain is not taxable income until it is realized, when a sale or exchange occurs; the gain or loss is the amount

realized minus the adjusted basis G. A gain is recognized in the year it is taxed (usually the year it is realized, unless it is a tax-deferred transaction or

taxes are excluded) H. The tax code classifies real property in six classes: principal residence, personal use, unimproved investment

property, property held for production of income, property used in a trade or business, and dealer property II. Non-recognition Transactions A. Installment sales 1. An installment sale occurs when less than 100% of the sales price is received in the year of sale 2. Taxes are only paid on the portion of the profit received each year 3. Installment sale reporting is allowed for all types of property except dealer property 4. The gain recognized in a given year is calculated based on the ratio of the gross profit (the difference

between the sales price and adjusted basis) to the contract price 5. The gross profit ratio is applied to principal payments received each year; all of the interest payments

received are taxable B. Involuntary conversions 1. Involuntary conversion occurs when an asset is turned into cash without voluntary action (such as it is

destroyed and the owner receives insurance proceeds) 2. The owner may realize a gain on the conversion, but recognition of the gain may be deferred if the money is

used to replace the property within the replacement period C. If a taxpayer owns certain low-income housing, sells it, and reinvests the proceeds in similar housing, the gain is

not recognized D. “Tax-free” exchanges 1. Section 1031 of the tax code allows tax-deferred exchanges of unimproved investment property, income

property, or property used in a trade or business for like-kind property 2. If nothing other than like-kind property is received in the exchange, no gain or loss is recognized in the year of

the exchange 3. If anything other than like-kind property is exchanged, it is known as boot and is recognized in the year of the

exchange 4. Boot may be cash, stock, personal property, or debt relief (the difference between mortgage balances) III. Special Provisions for Home Buyers and Sellers A. Exclusion from gain of sale of a principal residence 1. A taxpayer may exclude the entire gain on the sale of his principal residence, up to $250,000 if filing singly or

$500,000 if filing jointly 2. To qualify, the taxpayer must have owned and used the property as a principal residence for at least two

years in the previous five years B. First time homebuyers may withdraw funds from an IRA without paying a penalty or income tax on the funds in

some circumstances IV. Deductions Available to Property Owners A. Depreciation and cost recovery deductions 1. Depreciation deductions cannot be taken for a principal residence, personal use property, unimproved

investment property, or dealer property 2. For most real estate, the depreciation period is from 15 to 31-1/2 years 3. Depreciation deductions reduce the taxpayer’s adjusted basis in the property

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B. Uninsured casualty or theft loss deductions 1. If property is damaged or stolen, the property owner may deduct any uninsured loss from taxable income 2. For most types of property, the deductible loss is the reduction in value of the property minus the amount of

the insurance reimbursement C. Repair deductions are allowed for some properties, but not principal residences or personal use property D. Property tax deductions (and deductions for special assessments for repairs or maintenance) are allowed for

any type of property E. Mortgage interest deductions on debt of up to $1,000,000 used to buy, build, or improve a first or second

residence are allowed F. Discount points and origination fees are considered prepaid interest and may be deducted; other loan costs may

not be deducted G. Vacation homes are subject to different treatment if they are exclusively a personal use property or are rented

out part of the year H. Home office deductions are allowed for office space that is used regularly and exclusively for business, and that

is the individual’s principal place of business I. Rental payment deductions are allowed for business tenants (not owners) V. State Income Tax - Most states and some cities impose additional income taxes, usually very similar to federal taxes

in terms of deductions and definitions of income

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Lesson 16: Civil Rights and Fair Housing I. Civil Rights Act of 1866 A. The 1866 Act prohibits discrimination in real property transactions on the basis of race or ancestry B. The Act was largely ignored until 1968, when the Supreme Court upheld the Act in Jones v. Mayer C. Someone who has been discriminated against may sue in federal court, and may receive an injunction, actual

damages, and/or punitive damages II. Civil Rights Act of 1964 - The 1964 Act prohibited discrimination based on race, color, religion, or national origin in

many federal government programs related to housing III. Federal Fair Housing Act A. Title VIII of the Civil Rights Act of 1968 makes it illegal to discriminate on the basis of race, color, religion, sex,

national origin, disability, or familial status in the sale or lease of residential property (or vacant land for construction of residences)

B. Exemptions 1. For sale by owner transactions where no discriminatory ads are used and the owner does not own more than

three such homes 2. Rental of a unit or room in a dwelling with up to four units, provided one unit is owner-occupied, no broker is

used, and no discriminatory ads are used 3. Religious organizations may limit occupancy to their own members, provided that they don’t restrict

membership based on race, color, or national origin 4. Private clubs with lodgings that aren’t open to the public may limit occupancy or give preference to members C. Prohibited acts 1. Prohibited acts include refusing to rent or sell property after receiving a bona fide offer, refusing to negotiate,

changing terms of sale or lease for different buyers or tenants, using discriminatory advertising, representing that property is not available when it is in fact available, and using discriminatory criteria in making a loan

2. Blockbusting occurs when an agent induces homeowners to list properties by predicting that members of another race (or other protected class) will be moving into the neighborhood soon and property values will decline

3. Steering refers to channeling buyers or tenants away from (or to) particular neighborhoods because of their race (or other protected class)

4. Redlining is the refusal to make a loan in a particular neighborhood because of its racial or ethnic composition D. Handicap and familial status 1. A landlord must allow a disabled tenant to make modifications to a property at the tenant’s expense, if needed

for the tenant’s full use of the premises 2. Familial status refers to discrimination against a person for having a child (under 18 years old) living with him

or her 3. Exemptions from the prohibition against “adults only” complexes are available for properties that qualify as

“housing for older persons” E. HUD and enforcement 1. The Fair Housing Act is enforced through the Department of Housing and Urban Development’s Office of Fair

Housing and Equal Opportunity 2. An aggrieved person may file a complaint with HUD (where an administrative hearing may be held) or file a

lawsuit in federal or state court F. The administrative judge or court may issue an injunction and award actual damages and attorney’s fees; in a

federal court, punitive damages are also available IV. Federal Fair Lending Laws A. The Equal Credit Opportunity Act prohibits discrimination on basis of race, color, religion, national origin, sex,

marital status, age, or receipt of public assistance, in all consumer credit transactions (including home loans) B. The Home Mortgage Disclosure Act requires lenders to make annual reports on their lending activities to help

investigators find instance of redlining V. Equal Access to Facilities A. The Americans with Disabilities Act (ADA) is a federal law that seeks to provide equal access to public facilities

for disabled persons B. No one can be discriminated against on the basis of disability in any place of public accommodation (a private

entity with facilities open to the public) C. Architectural and communication barriers must be removed if it is “readily achievable” to do so

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VI. State Antidiscrimination Legislation - Most states, and many counties and cities, have their own antidiscrimination laws, which may cover more forms of discrimination and fewer exemptions than federal law

VII. Complying with Fair Housing Laws A. Agents should not make potentially discriminatory remarks or even go along with such remarks B. Advertisements for properties should not be limited only to certain neighborhoods or persons, and display ads

should use diverse models C. Actions that do not violate fair housing laws includes questions asked to better accommodate a disabled person,

positive efforts to reach out to members of a protected class, or truthfully answering questions about the racial composition of a neighborhood

VIII. Discriminatory Restrictive Covenants A. Discriminatory covenants were once common in deeds, but in 1948 the Supreme Court held that such covenants

were unenforceable B. These covenants may still appear in deeds; they are unenforceable, but it does not affect the validity of the

conveyance

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Lesson 17: Property Management I. Introduction to Property Management A. Property management is the supervision of operations of a building for its owner for a fee, either for a property

management company or directly under the employ of the owner B. Professional certifications for property managers include Certified Property Manager (CPM) or Accredited

Residential Manager (ARM) II. Investing in Real Estate A. Types of investments 1. An investment is an asset that is expected to generate a return (or profit) such as interest, dividends, or

appreciation in value 2. An ownership investment is one where the investor takes an ownership interest in the asset, such as real

estate or stocks 3. A debt investment is a loan that an investor makes to an entity, such as a bond B. Investment characteristics 1. Liquid investments can be converted to cash quickly, such as money in the bank (real estate is not

considered liquid) 2. Liquid investments are the safest, but they offer the lowest returns (or yields) C. Advantages of investing in real estate 1. Real estate is expected to appreciate at a rate equal to or higher than the rate of inflation; this increases the

owner’s equity (difference between the property value and the liens against it) 2. Real estate investors can use leverage, which means using borrowed money to invest in an asset that will

appreciate 3. Many real estate investments generate cash flow (spendable income left after all property expenses have

been paid) D. Disadvantages of investing in real estate 1. Real estate investment is more time-consuming and requires expert advice 2. Real estate investments are not liquid and may result in a negative cash flow III. Types of Managed Properties - The basic types of income-producing property are residential rental property, office

buildings, retail property, and industrial property; each have different needs IV. The Management Agreement A. The management agreement establishes the working relationship between property manager and property

owner B. The agreement should be in writing and signed by both parties, and describe the duties and powers of the

manager C. It should include the term of the agreement, the manager’s compensation, the legal description of the property,

whether the manager is authorized to collect and disburse funds and hold and disburse security deposits, and when and how the manager must make reports to the owner

V. The Management Plan A. Preliminary study 1. A management plan is an outline of the manager’s strategy for financial management and physical upkeep 2. Prior to preparing a management plan, the manager will need to analyze the region, the neighborhood, the

property, and the market 3. Regional analysis will consider occupancy rates, market rental rates, employment levels, and family size and

lifestyle in the local area 4. Neighborhood analysis will consider the growth or decline of population, economic status of residents, and

level of maintenance in the immediate surroundings 5. Property analysis will consider the physical condition of the building, services provided, current occupancy

rate, and size and efficiency of current staff 6. Market analysis will focus on units available, current prices, and occupancy rates in competing properties B. Management proposal 1. The proposal is developed after preliminary study and submitted to the owner for approval 2. The proposal contains a proposed rental schedule (all rental rates for all the different units), income and

expense projections, a schedule of day-to-day operations, and suggestions for physical changes

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VI. Management Functions A. Leasing and tenant relations 1. A manager’s tasks include marketing the rental spaces, negotiating leases, addressing tenant complaints,

and collecting rents 2. Marketing may include signs, newspaper advertising, radio and TV, and direct mail 3. A manager will need to show the property to prospective tenants, check the prospect’s financial history and

references, and then execute a rental agreement B. Recordkeeping and manager/owner relations - The manager will periodically prepare a statement of operations,

which will contain a summary, a rent roll (list of collected rents), a statement of disbursements, and a narrative report of operations

C. Maintenance 1. Preventive maintenance is oriented toward preserving the property’s integrity and preventing corrective

maintenance costs 2. Corrective maintenance is repairs to fix broken equipment and utilities 3. Housekeeping is cleaning of common areas and grounds 4. Maintenance may also involve new construction, which includes alterations made to units prior to tenants

beginning their tenancy D. A manager is responsible for risk management, which means preventing risks and mitigating them (by obtaining

insurance) VII. Landlord/Tenant Law A. Lease provisions 1. A tenant is entitled to quiet enjoyment of the leased premises, which means no disturbance by the landlord

or a third party with a lawful claim 2. Most leases demand rental payments at the beginning of each rental period; if it does not specify, rent is due

at the end of the rental period 3. A security deposit is usually required; states place restrictions on how large a deposit may be collected and

how it must be returned 4. In most states, a lease carries the landlord’s implied guarantee that the premises meet all building and

housing code regulations that affect health and safety B. Rent control ordinances in some cities may limit the amount of rent a landlord can charge VIII. Types of Leases A. A fixed lease (or gross lease) is for a fixed amount; the landlord pays all utilities, maintenance costs, taxes, and

insurance B. A graduated lease provides for periodic rent increases, usually set at specific future dates C. An index lease is a long-term lease that increases rents based on changes in an index that tracks inflation D. A net lease requires the tenant to pay the landlord a fixed rent, plus some or all of the operating expenses (such

as utilities, maintenance, or even taxes) E. A percentage lease is based on a minimum amount plus a percentage of the tenant’s business income F. A ground lease is a long-term lease of vacant land to a tenant who plans to construct a building on the land

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Lesson 18: Home Ownership and Construction I. To Rent or To Buy? A. Advantages of renting include less financial commitment, less financial risk, easier mobility, no need to perform

maintenance and repairs, and access to amenities B. Advantages of buying include long-term security, privacy and freedom from restrictions, stable monthly payments,

appreciation of the investment, and tax advantages (such as mortgage interest deduction) C. Real estate agents may use worksheets to show prospective buyers the net costs of renting and buying (taking

into account increases in equity and income tax deductions) II. Factors to Consider When Choosing a Home A. Types of housing - A buyer may choose between single-family homes, mobile homes, townhouses, duplexes,

condominiums, cooperatives, planned use developments, or mixed use developments B. Neighborhood considerations - A buyer should consider the neighborhood’s percentage of home ownership,

conformity, land use changes, presence of streets and sidewalks, availability of utilities and public services, school district, and overall property values

C. The home 1. A buyer should consider the site and view, the architectural style of the house, the exterior appearance, the

plumbing, electrical, and HVAC systems, energy-efficient features, and overall interior design 2. Possible environmental hazards that should be considered include asbestos, urea formaldehyde, radon, lead-

based paint, underground storage tanks, water contamination, illegal drug manufacturing, mold, and geologic hazards

III. Property Insurance A. An owner (the insured) pays an insurance company (the insurer) premiums, in exchange for a promise to

reimburse the insured for losses caused by specific perils B. The insurer will usually pay the replacement cost of the damage (or alternately the actual cash value of the loss) C. The most common homeowner’s policy is the basic form; others include the special form, tenant’s form,

comprehensive form, condominium unit owner’s form, mobile home form, and older homes form D. Flooding is excluded as a peril from most homeowner’s policies, but affordable flood insurance. For homeowners

in flood-prone areas is available through the National Flood Insurance Act E. Home warranties are not insurance policies, but protect owners against defects in a home’s utilities or systems IV. Construction A. Construction is guided by local building codes and regulations, which dictate types of materials and standards for

construction B. An architect designs buildings according to an owner’s needs and acts an the owner’s representative during the

construction phase C. Plans are drawings of the horizontal and vertical cross-sections of the building, while specifications are text that

specifies materials and workmanship standards to be used D. Wood frame construction elements include the foundation, framing, exterior sheathing and siding, interior

sheathing, roofing, floor covering, and the plumbing, electrical, and HVAC systems E. Some states require inspections for structural pest problems (such as termites) and require such reports to be

filed with the state

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Lesson 19: Real Estate Math I. Solving Math Problems A. The four steps to solving every math problem are: 1. Read the question 2. Write down the formula 3. Substitute the relevant numbers 4. Calculate B. If a problem presents you with fractions or percentages, first convert them into decimal numbers II. Area Problems A. Problems involving squares and rectangles use the formula Area = Length × Width B. Problems involving triangles use the formula Area = ½ Base × Height C. Odd shapes should be divided into squares, rectangles, and triangles, and then the area of each component

should be added up III. Volume Problems - The formula for a volume problem is Volume = Length × Width × Height IV. Percentage Problems A. The basic formula for percentage problems is Part = Whole × Percentage B. This can also be expressed as Whole = Part ÷ Percentage, or Percentage = Part ÷ Whole C. In commission problems, the part is the amount of the commission, the whole is the sales price, and the

percentage is the commission rate D. In loan problems, the part is the annual interest (you may need to multiply if it is expressed monthly or quarterly),

the whole is the loan amount, and the percentage is the annual interest rate E. In profit or loss problems, the formula is stated as Now = Then × Percentage (where the percentage is 100% plus

the percentage of profit or minus the percentage of loss) F. In capitalization problems, the formula is stated as Income = Value × Capitalization Rate (you may need to

calculate net income by applying an operating expense ratio to gross income) V. Tax Assessment Problems A. Tax assessment problems can be solved using the formula Tax = Assessed Value × Tax Rate B. The tax rate may be expressed, instead of as a percentage, as a dollar amount per hundred or per thousand

dollars of assessed value, or as a number of mills (one-tenth of one cent) per dollar of assessed value VI. Seller’s Net Problems A. A seller’s net problem determines how much a property will have to sell for, if a seller wants to net a specified

amount B. First, add the seller’s desired net to the costs of the sale except the commission C. Next, subtract the commission rate from 100% (i.e. 100% - 6% = 94%) D. Divide the total from step one by the total from step two to find the selling price VII. Proration Problems A. The three steps in a proration problem are to calculate the per diem (daily) rate of the expense, determine the

number of days for which the party is responsible, and multiply the per diem rate by the number of days B. Proration may be done using either a 365-day year or a 360-day year (a banker’s year, where every month is

considered to have 30 days) C. In property tax proration problems, the tax year may start some day other than January 1, and the payments may

be divided into installments, some of which may have already been paid D. In insurance proration problems, a seller has usually prepaid, and will be entitled to a refund of the unused portion E. In mortgage interest problems, there are separate calculations for the seller (who will owe interest from the first

day of the month when closing occurs, up to the closing date) and the buyer (who will prepay interest from the closing date to the last day of the month when closing occurs)

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State Portion

You must also read the License Law/Rules and Regulations information published by the Real Estate Commission. This information is available within the “Resources” of this lesson as well.