Modern Real Estate Practice, 16Th Edition

Modern Real Estate Practice, 16th Edition

ANSWER KEY

Part One: Real Estate General Theory

1. cThe duty of accounting requires that brokers give accurate copies of all documents to all parties to a transaction. In addition, the license law and related rules require that the broker deposit all earnest money in a special trust, or escrow, account by the close of business of the second working day after execution of the contract.

2. a In a revocable living trust, the trustor places titles to real estate, securities, and other assets into a trust while he or she is alive. The trust document outlines instructions for managing the assets and distributing them both in life and in death. The trustor can act as trustee and can be the beneficiary of the trust. It can be changed or revoked at any time. The irrevocable living trust cannot be amended or revoked once it is executed. A testamentary trust is established for management of an estate after the death of the trustor. A land trust is generally for speculative holding purposes.

3. d§1101.654 (a): “The commission shall suspend or revoke the license..” of anylicensee who is not a licensed attorney and who “…drafts an instrument, otherthan a form described by §1101.155, that transfers or otherwise affects aninterest in real property.”

4. cIndividuals who have AIDS or have an HIV-related illness are protected by thefair housing laws under the handicap classification. The protection for disability, however, does not include those who are current users of illegal or controlledsubstances nor individuals who have been convicted of the illegal manufactureor distribution of controlled substances. The law does protect recovering addicts.Marital status is protected under ECOA, not fair housing.

5. bThe Civil Rights Act of 1968 provided for certain exemptions as long as a realestate licensee was not involved in the transaction. For example, an exemptionis allowed for private clubs which may restrict the rental or occupancy oflodgings it owns to members-only, as long as the lodgings are not operatedcommercially. However, no exemptions involve race.

6. dFair housing laws bar discrimination in the sale and rental of housing based onthe presence of children (under 18 years of age) in the family, includingpregnancy (familial status). Discrimination in housing against two singlefemales (or males) would be prohibited based on “sex” (gender) rather than onfamilial status. Sexual orientation, on the other hand, is not a protectedclassification under federal law.

7. a Blockbusting (panic peddling) means inducing homeowners to sell by makingrepresentations that a change (resulting in lower property values) may occur inthe neighborhood with respect to race, sex, religion, color, handicap, familialstatus, or national origin.

8. cImplying that there is a standard fee across the real estate industry would be aviolation of antitrust laws which are designed to maintain and preserve businesscompetition.

9. dIn a civil suit, a person who suffered loss because of the antitrust activities of aguilty party may recover triple the value of actual damages plus attorney feesand costs.

10. dSince Mary’s advertisement indicates piano or Christmas tree, it is not indicatinga preference with regard to any protected category. Natalie’s ad is notdiscriminatory because an individual may indicate a specific preference if theyare sharing living arrangements with another person.

11. d§1101.557: “A license holder who represents a party in a real estate transactionacts as that party’s agent.” The listing and buyer representation agreementscreated express agency relationships with both clients thus placing Henry in therole of fiduciary to both Stan and James.

12. bSince this was an exclusive-agency agreement, Janet has agreed that while shewill not work with any other broker in her property search, she still retains theright to find her own property without incurring any commission obligation tothe broker.

13. cSince Mary’s homestead property has already sold at a tax foreclosure sale, the equitable right of redemption option is no longer available. The statutory right of redemption after the sale permits Mary to redeem the property by paying the amount paid at the tax sale, legal expenses, and 25% of the purchase price. During the second year after the tax sale, she would have to pay the amount paid at the tax sale, legal expenses, and 50% of the purchase price.

14. bAn exclusive-right-to-sell or exclusive-agency listing would have required Nancyto communicate the buyer’s offer through Kent’s exclusive agent, Ernie. Thiswould in turn have entitled Ernie to a commission as the procuring cause. In anopen listing, the seller retains the right to employ any number of brokers andonly the selling agent is entitled to a commission.

15. c To insure a lender against borrower default on low-down-payment loans, private mortgage insurance (PMI) is required on loans for which the borrower has invested less than 20 percent; that is, on loans with LTVs over 80 percent. PMI insures 25 to 30 percent of the loan amount, which limits the lender’s exposure to only 70 to 75 percent in the event of default.

16. aIf an agent has an express agreement with a seller and an implied agreement with a buyer, an undisclosed dual agency relationship would exist under common law. An undisclosed dual agency relationship is always illegal because it violates the common law duties of loyalty and disclosure and the requirement for informed consent of all parties.

17. bKent violated his fiduciary duty of loyalty by disclosing that Rebecca mightaccept a price lower than the listing price.

18. bOne of the essential elements of a contract is that the parties be competent. Acontract with a party adjudicated as incompetentis void and has no legalforce or effect.

19. a$95,900 (Total, sales price) × .07 (7%) (Rate) = $6,713 (Part)
$6,713 (Total, commission) x .50 (50%) (Rate) =
$3,356.50 (Part, selling broker’s share)
$3,356.50 (Total,selling broker) x .35 (35%) (Rate,selling salesperson) =
$1,174.78 (Part, selling salesperson’s share)
$1,174.78 – $35 expense = $1,139.78 (selling salesperson’s earnings)

20. c A metes-and-bounds description always ends at the point of beginning (POB) sothat the tract being described is fully enclosed (that is, the survey “closes”).

21. dUnlike improvements (structures), the land itself is indestructible and, therefore,not insurable.

22. aAlmost any item added as a permanent part of a building (i.e., cabinets) isconsidered a fixture and is automatically included with the real estate. Even ifKevin had been occupying the property legally, any improvements made byKevin would become the property of the landlord, without an agreement to thecontrary.

23. d One of the four unities required to create joint tenancy is unity of interest; thatis, equal interests to all the grantees. Sally and Ted own unequal shares. Since joint tenancy requires equal shares, Sally and Ted must have been cotenants in a tenancy in common. Ownership in severalty involves the ownership of only one legal entity.

24. dUnder Texas community property law, without an agreement to the contrary,income from separate property is community property; gifts received duringmarriage are separate property; and property acquired prior to marriage remainsseparate property.

25. cA purautre vie life estate is created when the grantor (Maria) conveys propertyto the life tenant (the nursing home) for the life of another (Maria’s parents.)The estate ends with the death of Maria’s parents at which time title will revertto Maria who holds a reversionary interest.

26. aIf Sharon has no restrictions and holds all right to Redacre forever, she holds titlein fee simple. The words so long as, until, while, or during are the key to thecreating of a determinable fee estate. Under a fee simple subject to acondition subsequent estate, Tim would have had only a right of reentry.

27. a In Texas, the homestead is exempt from forced sale by general creditors forpayment of most debts; however, several lien rights have been determined to beforeclosable even against a homestead—including unpaid taxes, mortgages, andhome improvement loans.

28. dCapital gains are the profits realized from the sale or exchange of an asset.Ric’s gain is $196,600 – $167,800 = $28,800. Since he is single and lived in theproperty for at least two of the previous five years, he would have been allowedto exclude up to $250,000 in gain.

29. bThe power of a government or public entity to take private property for a publicuse is eminent domain.

30. dSpecific liens are secured by a particular parcel of real estate and affect only thatproperty. General liens usually affect all of a debtor’s real and personalproperty.

31. c 348,480 sq ft × $0.75 per sq ft = $261,360 original cost
43,560 sq ft per acre ÷ 2 = 21,780 sq ft per ½ acre
348,480 sq ft ÷ 21,780 sq ft per ½ acre = 16 lots of ½ acre ea.
16 lots – 3 lots retained = 13 lots available for sale
13 lots × $24,125 per lot = $313,625 Sales Price
$313,625 – $261,360 = $52,265 profit on sale
$52,265 profit (Part) ÷ $261,360 paid (Total) = .2 = 20% profit on sale

32. bThe principle of conformity holds that an owner realizes maximum value if theproperty conforms to existing neighborhood standards in terms of design,construction, size, and age.

33. a The logical basis of the cost approach is that value can be estimated bycalculating the cost to replace or reproduce the improvements at today’s laborand material costs less estimated depreciation based on the age of theimprovements being appraised. Land is never depreciated.

34. dExternal obsolescence is caused by factors outside the property boundary.Depreciation due to physical deterioration or functional obsolescence occurswithin the property boundary.

35. bThe income approach to value is based on the premise that there is a relationshipbetween the income a property can earn and the property’s value. The ratio ofthat net operating income to the value of the property produces a rate of returncalled the capitalization rate; that is: Income ÷ Value = Rate.

36. dIn the appraisal of income or investment property, the income approach normallywould be the most reliable of the three approaches to value. The salescomparison approach is considered the most reliable in an appraisal of single-familyresidences. The cost approach is most helpful in the appraisal of newconstruction and for special-purpose buildings such as schools, churches, andother public buildings.

37. d Acompetitive market analysis or comparative market analysis (CMA) is an analysis of market activity amongcomparable properties (including sold, on the market, and removed from themarket.) A CMA is performed by a real estate broker (or a licensed associate ofthe broker) to determine a reasonable asking price and probable sales price. It isnot the same as the sales comparison approach to value used by a licensedappraiser to estimate market value.

38. b$1,530 monthly expense × 12 months = $18,360 annual expense
$62,500 gross annual income – $18,360 expenses = $44,140 NOI
Net Operating Income (NOI) ÷ Cap Rate = Value
$44,140 NOI ÷ .10 (10%) Cap Rate = $441,400 Value

39. dFor a contract to be enforceable, all parties must be legally competent. Contractswith the mentally infirm can be either void or voidable. A contract is void if theperson has been adjudicated to be incompetent. A contract signed by a personunder duress, menace, or undue influence is voidable at the option of the injuredparty or by a court.

40. dUnder a land contract (sometimes called contract for deed, an installmentcontract, or a contract of sale) the seller retains legal title to the property whilethe buyer takes possession and gets equitable title.

41. dAn option is a contract by which an optionor(owner) gives an optionee(prospective purchaser) the right to buy or lease at a fixed price within a statedperiod of time. The option fee would not be refunded if the optionee exercises theright to terminate the contract. An option is enforceable by only one party: theoptionee.

42.aThe five essential elements of a contract are competent parties, offer andacceptance, consideration, legality of object, and agreement in writing andsigned. The effective date is simply the date on which the communication ofacceptance was made.

43. dA counteroffer makes the original offer void. Thus while Kay may withdraw hercounteroffer at any time prior to Tom’s signing the contract and its acceptancebeing communicated to Kay, her counteroffer of $10,500 voids his original offerof $12,000. Tom is now free to accept, reject, or counteroffer Kay’s $12,000counteroffer.

44. a§1101.652 (b) (10): “The commission may suspend or revoke a license…if thelicense holder: …commingles money that belongs to another person with thelicense holder’s own money.”

45. aA mortgage fraud scheme contains some type of material misstatement, misrepresentation, or omission relating to the property or the potential mortgage. Wayne's inflating his income is an example of fraud for housing, an illegal action perpetrated by the borrower. Knowingly lending more money than a borrower can afford to repay, using high pressure sales tactics to sell home improvements and then financing them at high interest rates, and pressuring borrowers to accept higher-risk loans are examples of predatory lending.

46. b An offer or counteroffer may be withdrawn at any time before it has beenaccepted and notification of acceptance given to the other party or the otherparty’s agent, even if the person making the offer or counteroffer agreed to keepthe offer open for a set period of time. Earnest money is not deposited until anoffer is accepted; therefore, until there is acceptance, the seller would not beentitled to retain the earnest money as a remedy for the buyer’s default. Underno circumstances does the earnest money belong to the broker.

47. aAssignment refers to a transfer of rights and/or duties under a contract. Carol(obligor) has assigned her duties under the contract to Jamie (obligee). WhileJamie has acquired all the rights to be paid for the paint job, Carol remains liablefor the performance of the contract.

48. aAn offer is not considered to be accepted until the person making the offer hasbeen notified of the other party’s acceptance. This notification may be directlyto the party or the agent of the party. Since a subagent represents the seller, thennotification of the seller’s acceptance must be given directly to the buyer whohas no agent.

49. a Paragraph 15 of the TREC-promulgated One to Four Family Residential Contractspecifies remedies available to each party in the event of default. It states thatone remedy to the seller in case of the buyer’s default is to “…terminate thiscontract and receive the earnest money as liquidated damages, thereforereleasing both parties from this contract…”

50. bThe mortgagor is a borrower (Wilson) who conveys his or her property assecurity for a loan.

51. aThe due-on-sale clause (also called the alienation clause) states that the balanceof the debt becomes immediately due and payable at the mortgagee’s option ifthe property is sold by the mortgagor. The clause is frequently used to preventthe property from being sold on a loan assumption.

52. cWhen a mortgage requires periodic payments that will not fully amortize theamount of the loan by the time the final payment is due, then the final paymentmust of necessity be larger than the others. This is called a balloon payment.

53. dThe veteran may pay discount points (or may negotiate with the seller to pay aportion or all of the points) but cannot finance the points as part of the loan. Theloan origination fee—or flat charge—may not exceed 1% on a VA guaranteed loan.

54. d Abuydown fee pays a portion of the mortgage loan interest in advance which hasthe effect of temporarily reducing the interest rate. This reduces the borrower’smaximum house payment (PITI) to bring it within qualifying ratio limits.

55. cA deficiency judgment is a personal judgment against a mortgagor (borrower)when a foreclosure sale does not produce sufficient funds to satisfy the debt.

56. d Regulation Z does not apply to business or commercial loans or to agriculturalloans over $25,000. The right of rescission does not apply to residential firstmortgage loans that finance the purchase of a dwelling.

57. cECOA prohibits discrimination in lending based on source of income from publicassistance. It is not considered discrimination to refuse a loan to a financiallyunqualified individual.

58. bThe loan-to-value ratio (LTV), the ratio of debt to value of the property, iscalculated by dividing the amount of the loan by the value of the property.
Therefore:
Loan ÷ Sales price = Loan to Value (LTV) ratio
$125,000 loan ÷ $140,000 Sales price = 89.3% LTV

59. d Aconditional use permit allows a property use only if stipulated conditions are met. The special conditions are for the benefit of a neighborhood, not an individual property. A nonconforming use is one which predates the zoning ordinance or its amendments. A variance permits an exception to a zoning ordinance for the benefit of one parcel only, such as allowing an exception for the minimum square footage in a house or lot.

60. bAt closing, taxes are an accrued item to the seller; that is, an expense owed by theseller that will be paid at a later date by the buyer. Therefore, the seller isdebited (charged) for accrued taxes and the buyer is credited.

61. aA credit is an amount a person gets at closing for an expense that he or she hasalready paid. The earnest money is a credit to the buyer because paragraph 5 ofthe TREC-promulgated One to Four Family Residential contract obligates thebuyer to deposit the earnest money in escrow upon execution of the contract.The contract further obligates (paragraph 18) the escrow agent at closing toapply the earnest money first to any cash down payment then to other buyerexpenses.

62. dAn encumbrance may lessen the value or obstruct the use of the property, but itdoes not necessarily prevent a transfer of title.

63. aIf requested, the HUD-1 statement must be made available to the borrower oneday prior to closing. The other activities are specifically prohibited by RESPA.

64. aThe grantor (one conveying title) must be of sound mind and of lawful age.Although the grantee (one receiving title) must be named in the deed, only thesignature of the grantor is required. Neither an acknowledgment nor a jurat isessential to the validity of a deed in Texas; however, from a practical standpoint,a deed without either one or the other is not a satisfactory instrument because itcannot be recorded.

65. aUnless otherwise negated by express language in the deed, the word grant orconvey creates two implied warranties in a general warranty deed: Covenant ofSeisin and Covenant Against Encumbrances.

66. d A quitclaim deed carries no covenants or warranties and conveys only suchinterest that the grantor may have when the deed is delivered.

67. cThe 3-year statute does not apply since the Morris family has no general orspecial warranty deed. The 5-year statute also does not apply because it requiressome form of deed. They could assert a claim under the 10-year statute becauseit does not require a deed or other form of conveyance. The Morris family canshow that they have used, cultivated, or enjoyed the property for 10 years.