Real Estate Principles and Practices

How can liens, such as those created by non-payment of federal income tax, result in mortgage default?

New liens can threaten the lender's position as primary lienholder. Default can occur for this reason.

Homeowner Sophie moves around the country a lot for her job and has bought and sold several homes over the last decade. If she sells a home for more than she paid for it, how often may she claim the capital gains exclusion?

Once every two years

Which of the following could indicate an underground storage tank is present?

Pipe or vent sticking out of the ground

What does PITI stand for?

Principal, interest, taxes, insurance

The use of one investment to finance another is called _______.

Pyramiding

Which type of contract allows a buyer to legally possess the property after all of the terms and conditions have been met?

Sale agreement

The ______ method of appraisal compares sales data of comparable properties and adjusts for differences in order to arrive at a market value.

Sales comparison

What is the term for a vacation home, an investment property, or even a seasonal home a taxpayer uses for a few months every year?

Second home property

According to the process appraisers follow, what action is taken first upon being assigned a property for appraisal?

State the problem.

When a large tract of land is purchased and prepared for development, and then split into parcels, the value of each lot as a residential building site must be determined. The method used to value each individual parcel is known as the ______ method.

Subdivision development

Margot has fallen in love with a three-bedroom, 2,500-square-foot property in her friend's neighborhood. It's listed for $400,000. However, just down the street, another three-bedroom, 2,400-square-foot home very similar to the one Margot loves was just listed for $350,000. Margot and her agent immediately make an offer on the second property. Which economic principle is at work here?

Substitution

Which economic principle says that a property's value is determined by what it would cost to purchase a similar property?

Substitution

When depreciable property is sold, the IRS recaptures any depreciation taken on the property prior to the sale by _____.

Subtracting the amount of depreciation from the basis

The economic principle that tells us that when supply goes up, price goes down is also called ______.

Supply and demand

Which term describes the legal regulation of a property to the detriment of the owner, and must include reimbursement for the property owner?

Taking

What's the relationship between TILA, RESPA, and TRID?

The Dodd-Frank Act requires that lenders use the TILA-RESPA Integrated Disclosures (TRID).

Which one of the following is a description of economic depreciation?

The asset is worth less because the economy took a downturn.

What is the formula NOI ÷ V = R used to calculate?

The capitalization rate

Generally, recording fees are charged by ______.

The county where the property is located

What makes distressed properties a valuable niche for investors?

The discounted price

In a 1031 exchange, there are rules governed by Section 1031 of the Internal Revenue Code. The rules include _______.

The property in an exchange must be like-kind.

Which of the following would be considered a seller credit on the closing statement?

The purchase price

What is the 95% rule as it relates to tax-deferred exchanges?

The total value of the property (or properties) being exchanged is at least 95% of the value of the property being sold.

The Shores are in the process of buying a beautiful 3,000-square-foot home from the Bishops. They've completed all the required paperwork on their loan application. Mary's analyzing the package to determine their ability to repay the loan. She examines the property's value, the property type, and the loan-to-value ratio, among other things. Her recommendation is that the Shores' loan application be approved. What is Mary's role?

The underwriter

How will the buyer or seller know where and when the closing is being held?

Their agents will inform them of the date once it's set.

Once buyers submit their loan application, they must be given their Loan Estimate. At the very least, they must receive the Loan Estimate within ______.

Three business days after submitting the loan application

A buyer has received a Closing Disclosure from the lender. What's the purpose of this form?

To detail all costs the buyer will owe at closing

Why does an appraiser review the presence of environmental threats, such as earthquakes or flooding, when determining the value of a specific property?

To evaluate the potential influence of geographic factors on property values

What's the purpose of the Real Estate Settlement Procedures Act (RESPA)?

To protect consumers from unnecessarily high settlement costs due to abusive practices

In step five of the appraisal process, the appraiser estimates the ______.

Value of the land

Corinne, an escrow agent, is preparing for the Thomas/Trenton closing in four days. Which of these documents will Corinne prepare?

Working with the lender, she'll prepare the settlement statement, which details the costs the buyer and seller will have at closing.

Jennifer is the owner of the single-family residence in which she resides. How long can she take to depreciate her property?

Zero years (personal residences cannot be depreciated)

Ed is a licensee who's always eager to help his clients in any way he can. One of his current clients has received an offer that will give her a tidy profit on her home. She tells Ed she's worried about her tax liability when the home sells. What can Ed tell her that will be most helpful?

"I believe you'll be allowed to exclude some of that profit from your taxable income, but you should definitely consult with a tax professional to find out the best way to handle it."

What's the annual interest on a $20,000 loan on which the interest rate is 6.5%?

$1,300

A seller received $800,000 for a 5.5 acre rectangular parcel alongside a road frontage. The property is 400 feet deep. What was the price per front foot of the property?

$1,335.67 First, find the square footage (5.5 × 43,560 = 239,580). You're given one dimension of the rectangle, so find the other: 239,580 ÷ 400 = 598.95 front feet. To find the price per front foot, $800,000 ÷ 598.95 = $1,335.67 per front foot.

You're the agent for the Brewmans, who have listed their house for $425,000 and agreed to a commission rate of 5%. They're eager to sell, so even though the house is listed at $425,000, the Brewmans want to accept the first offer of $395,000. How much less will the Brewmans pay your broker in commission if they accept this offer?

$1,500

The Gomez family just moved into their dream home. They purchased the home for $264,985, and it appraised at $272,402. The assessment ratio for their area is 25%, and the tax rate for their area is 2.8%. What is their annual tax bill?

$1,907

Using a calendar year, what would the daily rate be if annual taxes are $4,662? Round to the nearest cent.

$12.77 A calendar year is 365 days, so take $4,662 ÷ 365 days = $12.77.

The gross income multiplier for an area is 12x. If the estimated annual rent is $10,000, what's the property's estimated value?

$120,000

Kelly bought Mason's home for $255,500. Mason had prepaid the annual property taxes of $2,650. If closing costs are calculated on a 360-day year, and the transaction closes on March 5, how much will Kelly owe Mason for property taxes? Carry numbers out four decimal places, but round to two decimal places for your final answer. The proration is calculated up to the day of closing, meaning that the buyer owns the day of closing.

$2,178.88 Divide $2,650 by 360 to get property tax costs per day: $7.3611. Multiply this by the number of days of ownership (296 days)

Lorena and Julio purchased a home for $205,950. Their loan amount was $164,760, and the assessed value is now $200,500. Their tax rate is 1.5%. How much will their monthly taxes be?

$250.62

Celina is considering buying a residential income property that has a potential gross income of $535,000 and a 12% vacancy and loss rate. The appraiser figures she'll pay $210,000 annually in total expenses. What's the NOI for this property?

$260,800 Multiply the potential gross income (PGI) by 12% ($535,000 x 0.12) to get the effective gross income (EGI). Subtract the EGI from the PGI ($535,000 - $64,200 = $470,800). Subtract expenses from the EGI ($470,800 - $210,000 = $260,800) to get the NOI.

The Walton family got a great deal on their new home. They bought it for $101,295, and it appraised at $187,000 in a region where assessed value is a percentage of appraised value. Using an assessment ratio of 25%, what is the assessed value of their new home?

$46,750

A home was appraised at $360,000, the assessment rate is 80%, and the tax rate is 22 mills. What are the yearly property taxes?

$6,336.00

When prorating annual property taxes of $2,400 using the statutory calendar, what's the daily rate, rounded to the nearest cent?

$6.67 $2,400 ÷ 360 days = $6.67.

Alistair bought a townhouse for $285,900. He got a 90% loan and the lender charged him 3-1/2 discount points. How much did Alistair pay in discount points?

$9,005.85 The sales price is $285,900, and 90% of that (aka our loan amount) is $257,310. The discount amount is 3-1/2 points, (.035) multiplied by $257,310 = $9,005.85.

Which section of the Internal Revenue Code allows the owner of real property to sell that property, then reinvest the proceeds in a "like-kind" property and defer paying any capital gains taxes?

1031

What does one hectare equal?

2.47 acres

How large is a section used in the rectangular survey system?

640 acres

You're working with buyers who are pre-approved for a loan up to $90,000. If they estimate paying $525 per month toward interest, what interest rate are they assuming?

7%

Margie needs to know the square footage for the first floor of the condo her client is interested in buying. The kitchen is 10 feet by 15 feet, the living/dining combo is 20 feet by 25 feet, and the office and bedroom are each 10 feet by 10 feet. What's the total square footage?

850 square feet

The statutory proration method calculates prorations based on _______.

A 30-day month or a 360-day year

Which of the following is most susceptible to a predatory lender?

A borrower with poor credit

Which of the following would be considered a foreign person according to FIRPTA?

A company incorporated in France with regional development offices in the U.S.

What is a loan origination fee?

A fee a lender charges for processing a loan

Sondra, a buyer, signs all the required mortgage documentation, promising to make all payments to her lender. Unfortunately, Sondra falls on hard times and misses multiple payments, and the bank indicates that it's going to foreclose on her. The foreclosure proceedings are more difficult for the lender because Sondra holds the deed to the land. What kind of state does Sondra live in?

A lien theory state

Days on market is an important market indicator. Which of the following is a true statement about days on market?

A lower number of days on market for a given neighborhood, compared to the surrounding area, means the market is popular with buyers.

Robin has great credit and was able to secure a loan for her ocean-side dream home. Her 30-year, fixed-rate loan is for an amount that's above conventional loan limits. What type of loan does Robin have?

A non-conforming loan

The Simpsons are buying a five-acre lot that was part of a much larger tract of acreage. When the owners of the large acreage decided to subdivide it, they needed to have a legal description created for the five-acre lot. What was used as the starting point for creating that legal description?

A survey

What method of land valuation is sometimes used when there's little comparable sales data available and large parcels of land are involved?

Abstraction method

With which of the four methods used to measure depreciation does the appraiser compare the structure's effective age at the time it's appraised with the structure's total economic life?

Age-life

Functional obsolescence

All of these (A fence post, An iron stake, A pine tree)

What's FIRPTA?

An act that applies to the sale of U.S. properties by non-U.S. citizens

What's a discount point?

An upfront charge to make up for the difference between the rate the borrower is receiving and the rate the lender normally requires

A beach house is valued at $425,000, based on the fact that it is expected to provide $48,000 in rental income over the next 20 years. This illustrates what principle of value?

Anticipation

Ray purchased a new home and soon discovered an issue with one of the windows. He filed a claim with the warranty provider, but it was denied. After mediation, the issue still remains unresolved. What is the most common next step?

Arbitration

In a face-to-face closing, who meets with whom?

Buyer and seller meet with one another

How can a foreclosure process be temporarily stalled?

By filing for Chapter 7 bankruptcy

Adjustments to closing costs are prorated as of what date?

Closing date

Which document is signed and agreed to at closing and reconciles what the final financial obligations are for both the buyer and seller?

Closing disclosure

When the buyer and seller both have costs to pay, which form shows who pays what?

Closing statement

Which approach to value measures the cost to produce a property, including land acquisition and construction costs?

Cost approach

A registered land surveyor is preparing a plat map that will show elevations and boundaries for a multi-level condominium complex. What is used as a reference point for measuring elevation?

Datum

Taxpayers who own a first and second home can _______.

Deduct all of the interest paid on debt not to exceed $1.1 million for both the first and second homes combined

Which mortgage clause requires the lender to discharge the mortgage lien once the borrower has paid in full?

Defeasance

Gerard has been offered a 4% interest rate on a $300,000 mortgage. His monthly mortgage payment would run about $950 per month. He plans to pay $2,000 up front to drop his interest rate to 3.75% and his payment to $920 per month. What is this upfront charge called?

Discount point

Leonard is offered a loan at 5.75%. Because he plans to be in his home for several years, he chooses to pay points up front to have the rate reduced to 5.25%. What's this an example of?

Discount points

How do you calculate the monthly rate for annual taxes using a statutory year?

Divide by 12

Which of the following methods is NOT used by appraisers to measure depreciation?

Economic value

Nearby industrial odor is an example of which type of depreciation?

External depreciation

When borrowers miss scheduled mortgage payments, allow their property to go into disrepair, or ______, they could face loan default.

Fail to pay property taxes

What's the most common indicator of illegal property flipping?

Falsely inflated appraisal

Which of the following is a characteristic of predatory lending?

Falsely inflated appraisal

Conventional loans may be conforming or nonconforming, depending on whether they meet ______ guidelines.

Fannie Mae and Freddie Mac

What could discolored soil, soft spots, or mounds on the land indicate?

Former waste disposal site

Homes in a new home development have been built with a floor plan that doesn't appeal to today's buyers. In a cost approach valuation of the houses, what sort of depreciation will the appraiser apply?

Functional obsolescence

Which of the following terms may be defined as a form of depreciation or loss in value caused by defects in design?

Functional obsolescence

Which act aims to stamp out identity theft?

Gramm Leach Bliley Privacy Act

Bob is quite proud of the 600-square-foot garage he's included in his new home. According to national standards, how can he include the garage square footage in his total?

He can only include it as unfinished square footage.

What does the sales comparison analyze in order to arrive at a value for a property?

How much other comparable properties have sold for

Which of the following is an example of an economic influencer of property value?

Interest rates and employment trends

What advantage does the 1031 tax-deferred exchange offer?

It allows investors to defer capital gains taxes when selling a property, provided they buy another property.

Why is tax-free refinancing so attractive to investors?

It allows investors to refinance repeatedly, generating tax-free cash with which to make additional investments.

What's one of the drawbacks of using the allocation method?

It doesn't account for differences between properties.

Which of the following best describes a blanket lien?

It gives lenders the ability to recover losses due to a foreclosure sale from any current or future property the borrower owns.

Harmony is looking at the legal description on her purchase contract. It mentions that the plat of her property is recorded in Map Book 12, page 14, at the county courthouse. What type of legal description is this?

Lot and block

Which type of legal description is this: "Plat of Block 28, Woodmen Heights Tract, recorded in Map Book 27, page 68, at the Eldor County Records Office"?

Lot and block

Which of the following is a characteristic of predatory lending?

Making loans the consumer can't afford

What's the price at which a willing buyer and a willing seller would strike a deal given normal market conditions?

Market value

Morty, a land surveyor, was called out to survey a property. After doing some research, he located the legal description for the property in question. Now, if he could just find the point of beginning located at the iron pin on the southerly line of state route 117, 30 feet east of the oak tree next to Bear Creek. What type of legal description is Morty working with?

Metes and bounds