Free National Real Estate Practice Exam (100 Questions)

Joan is the optionor, and Bob is the optionee. And Bob can assign an option if he wants. Joan cannot force to purchase the property. Remember, a seller cannot force a buyer to buy the property with an option to purchase. It's worth noting that they can in a lease to purchase, but in the question, it specifies it's an option contract.

A unilateral contract is a contract in which only one party makes a promise to perform an action. An insurance contract or a reward contract are both examples of unilateral contracts. Unilateral contracts appear more often than you may think; one of the most common instances is a reward contract. Imagine you’ve lost your cat, Coco. You place an advertisement online offering a $250 reward to the person who returns Coco. By providing a reward, you’re offering a unilateral contract.

A satisfaction of mortgage records that the mortgage debt has been paid and the mortgage lien discharged. The name and required release procedure vary by jurisdiction.

Remember, community property and tenants by the entirety is through marriage. You can't have that form of ownership with two unmarried individuals. Tenancy in common would be the best answer. TIC is when a parcel of real estate is owned by two or more tenants. Upon the death of a tenant in common, that share is transferred to the estate or heir of the deceased tenant. Unlike with a joint tenancy, tenants in common have no rights of survivorship. So knowing that Tina and Tom do not have a right to survivorship and are unmarried, we can assume they have a tenancy in common. The amount of interest really doesn't matter in this case.

The lender generally orders the appraisal used for its mortgage decision. The borrower may be required to pay the appraisal fee; the seller does not automatically pay it merely because the property is sold. A mortgagor is the borrower, while a mortgagee is the lender.

Sources: CFPB appraisal guide; NCUA mortgage glossary.

Puffing is an extravagant claim made by sellers in order to attract buyers. Puffing is usually common for a lot of sales people. Real estate agents included. It’s one of those things that occur often. It happens in ads, stores, and pretty much everywhere sales happen. Puffing is legal as long as the statements are not fraudulent. Read More Here

A cash reserve fund is an account set aside by an individual or business to meet any unexpected future costs, as well as the future costs of upkeep. Property managers use these funds for variable expenses.

The term is used very often in real estate. Equity is the difference between the market value of your home and the amount you owe the lender who holds the mortgage. Your equity is the money you'd receive after paying off the mortgage if you were to sell the home.

Economic obsolescence refers to the loss of property value due to external factors, meaning things off the property affecting the properties value. A new noisy highway would be considered economic obsolescence because it is an external factor. Usually, in these circumstances, homeowners cannot do anything to prevent it. Read More Here

The contract was established under duress, fraud, deception, or coercion making it voidable. A voidable contract is a legal agreement between two parties that may be unenforceable for any number of reasons. Voidable contracts have the necessary elements to be enforceable, so they appear to be valid, but can be rejected by one party if the contract is discovered to have any number of defects.

In the cost approach, accrued depreciation is deducted from the cost of improvements. Income valuation can also reflect depreciation through income expectations or recapture, so depreciation is not exclusive to one approach.

The annual gross rent multiplier is the property price divided by gross annual rental income: $500,000 ÷ $75,000 = 6.6666..., which rounds to 6.67.

This question expressly asks for an annual GRM. Using monthly rent of $75,000 ÷ 12 = $6,250 would give a monthly multiplier of 80 instead. GRM and GIM can use monthly or annual income, but the time period must be applied consistently. GRM uses rental income; GIM can include other property income.

California DRE Reference Book, Chapter 15, page 419

As a general rule of thumb all written offers must be presented to the seller. It is a serious breach of a real estate agent's fiduciary duty to the seller not to present all purchase offers.

Color of title refers to a claim to title that appears to be legally valid but may be defective. This legal concept is often discussed in adverse possession claims. If adverse possession is claimed under color of title, usually the claims are met sooner or in an easier fashion. Read More Here

Estates can be divided into two different sections: freehold estates, and less than freehold estates(or leasehold estates).The key difference between a leasehold estate and a freehold estate is the limitation of time. A freehold estate is an estate in which you have exclusive right to enjoy the possession of a property for an undefined length of time, while a leasehold estate is an estate held by one who rents or leases property for a period of time. Read More Here

The traditional common-law model lists six covenants of title: seisin, right to convey, against encumbrances, quiet enjoyment, warranty, and further assurances. Six falls within the “Five to six” answer range.

This question concerns a general warranty deed. A special warranty deed limits the grantor’s warranty to claims arising by, through, or under that grantor. Actual covenants and their wording depend on the deed and applicable state law; do not assume every deed contains six separately stated promises.

Reference: Cornell Legal Information Institute, deed and traditional covenants of title.

First find assessed value: $350,000 × 0.15 = $52,500.

One mill is $1 per $1,000 of assessed value. Convert 27.50 mills by dividing by 1,000: 27.50 ÷ 1,000 = 0.02750. This moves the decimal three places to the left.

Annual property tax = $52,500 × 0.02750 = $1,443.75. The 15% assessment rate and 27.50-mill tax rate are given for this practice problem; actual assessment rules and tax rates vary by locality.

No replacement cost, is the cost of replacing an asset or property. Reproduction cost estimates how much it would cost to exactly reproduce an asset or property to exact specifications. Reproduction cost looks at the cost of creating an exact replica, and should not be confused with replacement cost, which looks at the cost of replacing an insured property with one of similar functionality. Reproduction cost is more specific.

In this problem we have to find the annual property taxes. First off we have to find the assessed value. In order to do that we have to take the market value which is $400,000 and then multiply it by the assessment rate which is 25%. So $400,000 x .25 = $100,000. Now that we the assessed value we must subtract the deductions. So $100,000 - $25,000 = $75,000. The next step is to utilize mills. The mill rate is the amount of tax payable per dollar of the assessed value of a property. So we have to multiply the assessed value by the mill rate which is $75,000 x .02275 = $1,706.25 So the annual property taxes on the property is $1,706.25.

The much larger final payment makes this a balloon loan. The scheduled payments leave a remaining balance due at the end of the term; they do not fully amortize the loan.

A double net lease is when two additional costs will be added to your base rent. Usually taxes and insurance costs are added to your monthly payment.

Codicil (pronounced kaa-duh-sl) is a written supplement or amendment to an existing will such as one affecting the transfer of real estate upon death. In plain terms it's an addendum of any kind to a will.

A prepayment penalty is a charge for paying off some or all of a loan early under specified terms. Whether it is permitted, and its amount and duration, depend on the loan and applicable law.

A negotiated flat fee is a permitted form of broker compensation. Agreement alone does not override licensing, disclosure, settlement-fee or other applicable rules.

It’s important the buyer and seller clearly understand the document as it becomes legally binding as soon as both parties sign. It is an agent's duty to explain to purchase agreement and not mislead both or either parties.

A fixture is any physical property that is permanently attached to real property. Trade fixtures refer to items installed in connection with the business, such as stoves or refrigerators in a restaurant.

Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. The interest rate decreases not the down payment. They are a great option for someone who knows they will be owning a specific property for a long time. Mortgage points are directly paid to the lender or bank at closing.

If a dispute is pending, the court will likely issue an injunction preventing Mr. Joe from cutting down the trees until they are entirely resolved. Injunctions can be used to protect interests in real property. A court ordered injunction can be used to prevent a harmful action, stop ongoing or repeated conduct, or force a defendant to take action to prevent harm.

Remember, execution means the contract is closed and cannot be assigned. Only executory contracts can be assigned.

The surface rights are the rights to use the surface of the earth. Subsurface rights are the rights to the natural resources lying below the earth's surface. Interestingly an owner may transfer rights without transferring the subsurface rights. For example, a landowner can sell his rights to an oil and gas company in his land but still can own the land itself.

The keywords here are lender and payment. Some of these provisions protect the borrower, lender, or both. The Acceleration Clause and Prepayment Penalty Clause is the best answer here. The acceleration clause is a contract provision that requires a borrower to repay all of an outstanding loan if upon a breach of the contract - which definitely protects the lenders and their interests by asking for repayment. A prepayment penalty clause states that a lender can penalize a borrower if the borrower pays off the mortgage much sooner than usual - This definitely protects the lenders, their interests, and results in repayment as well. Within the other answers the clauses may, or may not protect lenders, or do not require some form of payment or insurance.

A lease option is when a lease is combined with an option contract.

Appraisals are the best way to determine fair value. The overall appraisal process is based on a number of factors, such as its cost, the income it generates or its fair market value as compared to similar assets.

Economic life is the expected period of time during which an asset remains useful to the average owner. When an asset is no longer useful to its owner, then it is said to be past its economic life. The economic life of an asset could be different than its actual physical life.

Intangible Deterioration. There is no such thing as intangible deterioration. All the others are forms of depreciation.

The person who hires or appoints an agent is called the principal. In plain terms, the principals in a real estate sales transaction would be the buyer and the seller.

This is a financing contingency. It conditions the buyer’s obligation to complete the purchase on the stated financing terms. The contract can bind the parties before that condition is resolved; cancellation, notice deadlines and deposit treatment follow its terms.

A prepayment penalty clause states that a lender can penalize a borrower if the borrower pays off the mortgage much sooner than usual. Lenders are required to disclose prepayment penalties at closing in the form of a prepayment penalty clause.

The execution date or date executed is the day the contract is signed. The effective date is the day the contract goes into effect. Both dates can both be found in a contract. In many instances, the execution and effective dates are the same; however, that is not the case in some circumstances. You might sign a lease today to move into an apartment, but you won’t be able to move in until the following week. The execution date might be today, but the effective date will be when you move into your brand new home. Many times, the execution date and effective date are the same, but again not always.

The formula for finding commission is pretty simple. Just times whatever percentage you have by the total price of the house. In this case, they give us the rate and what the broker received so we have to adjust the steps. In order to find the commission, you can take $11,000 and divide it by the percentage which is .055 making your total $200,000. Alternatively, you can take the answers below and multiply each one by .055 and whichever matches the broker's commission is the correct answer.

Condo is short for condominium. A condominium generally combines separate ownership of a unit with an interest in common property. The unit can be financed or rented; condominium describes ownership, not whether its occupant is an owner or tenant.

Specific performance is an equitable remedy in the law of contract, whereby a court issues an order requiring a party to perform a specific act, such as to complete performance of the contract. In our instance since the washer and dryer were included in the contract, the buyer may sue the seller for specific performance.

Consideration need not be cash; it can be a promise, an act or forbearance of legal value. Capacity, consent and lawful purpose also matter.

Agents or brokers function under certain legally mandated duties called fiduciary duties. Fiduciary duties include: Loyalty, confidentiality, disclosure, obedience, reasonable care and diligence, accounting and more. Honesty and fairness must be given to an unrepresented buyer.

Users, owners, renters, developers, renovators, and facilitators are the main participants in real estate markets.

Radon is radioactive gas dispersed from natural decay of mineral in earth. odorless, colorless, tasteless. Rises out of ground and enters homes through openings in basement where usually found. If trapped inside a house, can increase to harmful health levels. Small particles inhaled into lungs can cause cancer. Can also contaminate groundwater. Radon is usually detected by radon test kits.

A Sole Proprietorship is one individual or married couple in business alone. Sole proprietorship's are the most common form of business structure. This type of business is simple to form and operate and may enjoy greater flexibility of management, fewer legal controls, and fewer taxes. However, the business owner is personally liable for all debts incurred by the business. A sole proprietor may purchase property for both personal and business use through his own name or through the name of his business. However, only personal property used in direct relation to business operations is viewed as a tax-deductible business expense.

The five most popular types of businesses are Sole Proprietorship, General Partnership, Limited Partnership, Corporation, and Limited Liability Company (LLC). From the question above; "Corporation, Sole Proprietorship, Limited Liability Company" are all real business structures. Here are the definitions: Corporations may be formed for profit or nonprofit purposes. A corporation is managed and operated by a board of directors. A Sole Proprietorship is one individual or married couple in business alone. Lastly, an (LLC) is a hybrid legal entity that has certain characteristics of both a corporation and a partnership or sole proprietorship.

Disclosure statements, purchase contracts, and exclusive agency contracts are all legal documents but it is the listing agreement that clearly defines the relationship between the broker and seller.

A comparative market analysis is an examination of the prices at which similar properties in the same area recently sold. Agents can use a comparative market analysis for their clients to help them determine a price when selling or buying a home.

An easement in gross benefits a person or entity, such as a utility company, rather than another parcel of land. A utility right-of-way across the burdened property is a common example.

Constructive eviction can arise from substantial interference with a tenant’s use caused by the landlord’s conduct or failure to act. Notice, an opportunity to cure and leaving the premises may matter under the governing law; it does not permit every tenant to terminate immediately.

Technically speaking, if there is a high occupancy rate (higher than usual), rent may be too low. The theory of supply and demand supports this. Property managers need to be aware of this as one of their responsibilities is to make sure the rental property is at max profitability.

Sales comparison uses recent sales of comparable land to estimate the lot’s value. The cost approach can combine land value with depreciated improvements; the income approach considers income-producing potential.

The overall appraisal process is based on a number of factors and appraisers usually use a combination of approaches but give weight to the most the most important. The income approach determines what a property generates in terms of income for its owner, that income, or potential for income. It is then used to calculate or identify the market value of the property. The income approach is primarily used for rental properties and this case would be given the most weight in the appraisal process.

The federal disclosure rule generally covers most housing built before 1978, with specified exemptions. Before a buyer or renter is obligated under a contract, covered sellers and landlords must disclose known lead-based paint information, provide available records and the EPA pamphlet, and include the required contract disclosures. Buyers also receive an opportunity for a lead inspection or risk assessment, normally 10 days; the parties may agree in writing to a different period, or the buyer may waive it. The underlying Residential Lead-Based Paint Hazard Reduction Act was enacted in 1992.

When a purchaser signs a purchase agreement and gives the seller's broker a large check it is considered an offer. When a potential buyer is found, the agent must help them prepare an offer to purchase the property. The form itself is usually pre-drafted or preprinted. Forms vary from state to state. It is customary but not required for a buyer to provide a deposit when making an offer to purchase. This deposit is referred to as earnest money. It’s important the buyer understands the document as it becomes legally binding as soon as they sign it.

In order for a contract to be valid a few things must occur:

-The party must be at least 18 years old and of sound mind.

-A contract must be legal. For example, there cannot be a contract to kill, steal or anything illegal.

-The contract must hold a clear and definite consideration.

-There must be mutual consent of the contract.

Any offer to purchase real estate MUST be signed by both the buyer and seller in order to be valid. Both parties must follow these guidelines. It becomes a legal contract as soon as both parties sign.

Steve should advise the agents that their proposed agreement could violate the Sherman Antitrust Act, refuse to participate, and leave the price-fixing discussion. Competing businesses must set their prices independently.

The key fact is the proposed agreement among competitors. Advertising an independently determined fee, negotiating a commission with a client, or merely having similar prices is not automatically price fixing. An unlawful agreement need not be written. State laws may impose additional requirements.

Source: FTC guidance on price fixing.

An agent representing a principal owes duties including loyalty, care, disclosure, confidentiality and accounting within the relationship. This question concerns the principal’s representative, rather than every role that may carry fiduciary duties.

The principle of anticipation in appraisal is the principle that the value of property today is the present value of the sum of anticipated future benefits. It’s also worth noting that the principle of anticipation doesn’t always refer to monetary gain. It could also be emotional or mental gain.

An amendment changes an existing contract. Here, both parties agree in writing to change their already binding purchase agreement by including furniture.

An amendment may add terms as well as change or remove them. An addendum is generally a supplemental attachment incorporated into an agreement. The labels used by local forms can vary, so read the document and follow the applicable law; “adds” versus “changes” alone is not a reliable distinction.

Official example: the Texas Real Estate Commission’s Amendment to Contract is used to change or add terms to an already executed contract.

The correct answer is a lien securing the debt while the borrower retains title. Under lien theory, the mortgage itself creates a security interest rather than transferring legal title to the lender. This does not mean that a lender could never later acquire title through a separate transaction or foreclosure.

For a statutory example, Florida section 697.02 treats a mortgage as a specific lien, not a conveyance of legal title or possession. Foreclosure procedures depend on applicable state law and the security instrument.

Source: Florida Statutes 697.02.

Safe Drinking Water Act (SDWA) was established in 1974. It allowed greater control by EPA to control contaminant levels, take legal action against public water auth. for violations, and require periodic water testing and notification to state authority and homeowners if contaminated.

Remember. A Dominant Estate is a parcel of real property that has an easement over another piece of property. A Servient Estate is a parcel of land that is subject to an easement.

The income approach determines how much a property generates income for it’s owner, that income, or potential for income. This is used to calculate or identify the market value of the property. The income approach is primarily used for rental properties as not all properties normally generate income.

Redlining is discriminatory denial or avoidance of credit services to neighborhoods because of race, color or national origin. Steering is a different practice: directing people toward or away from housing because of protected characteristics. Neither term means price fixing, which concerns an agreement among competitors to set prices.

Joint tenancy is the best answer because the stated ownership includes equal interests and survivorship. Tenancy in common does not itself provide survivorship. Other ownership forms and eligibility rules vary by state, including rules for registered domestic partners.

A blind offer in real estate is a purchase contract written by a buyer without seeing the property. This is common in commercial properties such as apartment complexes, and it’s not uncommon in multi-family homes such as duplexes and fourplexes. It’s not typical in single-family homes or apartments.

Closing is known by many names. Some areas of the country may call it settlement and transfer some may call it passing papers. The textbook name is for closing is closing.

Real property includes land, qualifying attachments and the associated legal interests. Fixtures, trade fixtures and crops have specific classification rules; business use alone does not determine whether an item is real or personal property.

Often agencies compete with each other like any businesses due. They also sometimes work together on big projects and such. Brokerages connect using a multiple listing service (MLS). It connects listings together under one large umbrella.

VA-backed purchase loans may offer benefits such as no required down payment in qualifying circumstances and no monthly mortgage insurance. A borrower must meet eligibility, lender credit/income and occupancy requirements. Rates and other terms vary by lender.

In this instance age doesn't really matter. What does matter is that the middle age couple has a mortgage with a high interest rate and at the current rates at much lower. They would most likely qualify for a refinance and they would definitely derive the most value from it. Bonus tip. The rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. Generally speaking, homeowners should have a solid credit score to refinance, although there are a few exceptions in government run loan assistance programs.

Compliance with zoning ordinances is monitored through the issuance of zoning permits; where the property owner or developer cannot substantially alter the use of the property without getting a zoning permit, which will not be issued unless the proposed development conforms to the zoning ordinance. Zoning permits are usually required before building permits can be issued.

Think of supply and demand like a scale usually if one side raises, the other will lower or vice versa. Generally, low supply and high demand increase price. In contrast, the greater the supply and the lower the demand, the price tends to fall. So in real estate terms, when the supply of available houses in an area decreases significantly the average cost of housing goes up.

Blockbusting, also sometimes referred to as "panic selling," is a discriminatory and illegal real estate practice. Blockbusting is when real estate agents try to increase their sales and profit by suggesting that people leave their neighborhoods before property values decrease. They may base their statements about these declining values on the race, ethnicity, or economic class of some of the people living in the neighborhood.

Consideration is anything of legal value that is offered in exchange by one party for something of value from another party. Common forms of consideration include money, property in exchange, work or a promise to perform. Without consideration, a contract is not valid.

Economic Obsolescence refers to the loss of property value due to external factors, meaning things off the property affecting the properties value. Examples of causes of economic obsolescence can include: flight patterns, a busy highway, and rise in local crime. Read More Here

The proper procedure for changing a contract that has already become binding is to sign a separate amendment. Remember, separate amendments are used to modify or change executory contracts.

Earnest money should be deposited into a trust account in a timely manner, according to state laws. While the time period varies from state-to-state its best practice to always deposit the money as soon as possible.

States may require additional information, but federally at the minimum, all advertising for property or services must include the broker firm's name. This is all for all advertising, social media included.

An individual seeking to be excused from the requirements of a zoning ordinance needs a variance. A variance is a request to deviate from current zoning requirements. If granted, it permits the owner to use his land in a way that is ordinarily not permitted by the zoning ordinance.

Usury is the practice of making unethical or immoral monetary loans that unfairly enrich the lender. Currently, most states have usury laws in place and set a cap on the maximum amount of interest a lender can charge. These rates can vary significantly by state and may differ depending on the type of financial product you’re using. Usury is a form of predatory lending.

The three main forms of depreciation are : Economic Obsolescence, Functional Obsolescence, and Physical Deterioration.

The primary public land-use control is zoning. The primary private land-use control is deed restrictions or restrictive covenants, which limit what can be done on the property by the owner. Deed restrictions are limitations to the use of the property imposed by a past or current owner and are usually legally bound forever.

Void contracts are not contracts because they lack an essential element of a contract and are thus unenforceable. Voidable contracts have the necessary elements to be enforceable, so they appear to be valid, but can be rejected by one party if the contract is discovered to have any number of defects.

A real estate agent is a professional who has passed the required real estate classes and licensing exams in the state where he/she intends to work. This is the starting point for most real estate professionals agents. Agents are also legally called a licensee or license holder.

Emblements are annual crops cultivated by a tenant that is treated as the tenant's personal property. Read More Here

Severance is the opposite of attachment. Severance is taking an item that is attached to the land and removing it as personal property.

Eminent domain is the government’s constitutional right to take over privately-owned real for public use (usually despite the owners’ wishes). Eminent domain for the federal government is protected under the Fifth Amendment of the Constitution, while for state governments, it is protected under the Fourteenth Amendment. Mr Jay’s example is an example of eminent domain. Read More Here

Functional obsolescence refers to the loss of property value due to an obsolete design feature. Outdated plumbing would be considered functionally obsolete because it is outdated. Who determines what is obsolete or not? Usually the buyer or homeowners. If a neighborhood is filled houses with new bathrooms and/or new plumbing, and your's isn't, It would be considered functionally obsolete. Read More Here

Eminent domain is the power to take private property for public use, subject to just compensation. The Fifth Amendment limits that power; its protections also apply to state and local government through the Fourteenth Amendment.

Demand is an economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service (holding all other factors constant).

Novation substitutes a new obligation or party with the necessary consent and releases the obligation it replaces. A delegation alone need not release the original party.

A real estate option contract is a one-of-a-kind contract that is solely between the seller and the buyer. In this arrangement, the seller gives the buyer the option to purchase property at a given price for a set period.

The Superfund Amendments and Re-authorization Act of 1986 (SARA) was passed when the original act, CERCLA, expired in 1985. It amended the comprehensive environmental response, compensation, and liability act. The big change had to do with liability. When a property owner has been innocent of all involvement with a hazardous waste site, under certain circumstances, he may claim immunity from responsibility. In plain terms it allows truly innocent landowners to have immunity from legal liability. SARA also required EPA to revise the Hazard Ranking System to ensure that it accurately assessed the relative degree of risk to human health and the environment posed.

In real estate, commingling refers to the act of mixing the client’s funds with the broker’s own funds. Commingling can be both legal and illegal depending on the state and circumstance. Typically, from an agent’s perspective, commingling should be avoided at all costs. Commingling can be legal in some circumstances, but in most cases, as an agent or a broker, it’s best to avoid it.

The correct answer is her death. The deed expressly identifies Gabby as the person whose life measures this estate. It is her life-estate interest that ends; ownership of the property then continues in the holder of the applicable future interest.

A life estate can instead be measured by another person’s life, called an estate pur autre vie. The life tenant and the person whose life measures the estate need not be the same person. Giving someone a life estate alone should not substitute for stating the measuring life in this question.

For a statutory example recognizing an estate measured by a third person’s life, see California Civil Code 766.