Real Esate Exam Prep California 2017
Real Esate Exam Prep California 2017
California Real
Estate License
Exam Prep:
Unlocking the DRE
Salesperson and
Broker Exam
Sixth Edition
Cutoff Dates:
Editorial Staff
Legal Editor/Publisher:
Fred Crane
Project Editors:
William L. Mansfield
Connor P. Wallmark
Contributing Editors:
Oscar M. Alvarez
Gregory Bretado
Bethany Correia
Emily Kordys
Carrie B. Reyes
Benjamin Smith
Graphic Designer:
Mary LaRochelle
Acknowledgments
Please call first tuesday with any questions or comments regarding the
printed book or online materials. Customer service representatives are
available 8:30 AM to 5:00 PM Monday through Friday at 951.781.7300.
Table of Introduction.........................................................................................................................v
Contents
Applying for the State Exam. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Critical facts How the DRE licensing exam works. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
regarding the What the exam looks like. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
DRE licensing Acceptable forms of identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63-82
Just the facts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Chapter 4:
General concepts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Financing
Sources of financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Mortgages/deeds of trust/notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Types of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Government programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Financing/credit laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Loan brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Types of loan originators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Default and foreclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Chapter 4 sample questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Answer key and explanations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Tax aspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Special processes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Transfer through court supervision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Types of vesting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Chapter 5 sample questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Answer key and explanations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125-142
Chapter 7: Just the facts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Contracts General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Listing agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Table of Contents v
* NEW *
Challenge Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
Are you preparing for the broker exam? Or do you really want to test Challenge
yourself in preparation for the salesperson exam? Questions
vi Introduction
Defines key terms likely to appear on the State Exam with page references
Real estate where the topic appears in the book. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
glossary
The California Real Estate License Exam Prep book is part of Realty
Introduction Publications, Inc. series of California-specific study materials. As part of a
comprehensive real estate education program, the licensing series includes:
The salesperson exam contains 150 questions and is administered in a three hour session.
The broker exam contains 200 questions and is administered in a four hour session.
2 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
DRE processing time: 3-6 weeks. You have 2 years to pass the State Exam.
• Fill out Salesperson Examination Application (RE 400A). (Broker Examination Application (RE 400B)
and Employment Verification (RE 226) or Equivalent Experience Verification (RE 227) for broker
licensing.)
• Pay a $60 exam fee ($95 for broker licensing) by check payable to “Department of Real Estate” or
by credit card using Credit Card Payment (RE 909).
• Mail the required documents, the exam fee payment and your licensing course certificates to:
Department of Real Estate Examination Section
PO Box 137001
Sacramento, CA 95813-7001
You will receive a letter from DRE clearing you for the state exam. Schedule your State Exam date and
location by registering for an eLicensing account at www.dre.ca.gov.
5. What to mail?
DRE processing time: 3-6 weeks. You have 1 year from passing the State Exam to
apply for your License.
DRE will send you Salesperson License Application (RE 202) for you to complete. (Broker
License Application (RE 200) for broker licensing.)
Send the completed application and 1 copy of RE 237 (brokers send RE 226 or RE 227),
the $245 licensing fee ($300 for brokers) by check payable to “Bureau of Real Estate” or
by credit card using RE 909, to:
Department of Real Estate Examination Section
PO Box 137002
Sacramento, CA 95813-7002
When your license application has been processed, you will receive your real estate license.
Critical facts regarding the DRE licensing exam 3
Fill out and sign Salesperson Exam/License Application (RE 435). (For broker licensing use Broker Exam/License
Application (RE 436) and Employment Verification (RE 226) or Equivalent Experience Verification (RE 227).)
3. What to mail?
Send your licensing course certificates, the completed application and 1 copy of RE 237 (brokers send RE 226
or RE 227), the $245 licensing fee ($300 for brokers) by check payable to “Bureau of Real Estate” or by credit
card using RE 909, to:
Department of Real Estate Examination Section
PO Box 137002
Sacramento, CA 95813-7001
You will receive a letter from DRE clearing you for the state exam. Schedule your State Exam
date and location by registering for an eLicensing account at www.dre.ca.gov.
When you pass, you will receive your real estate license.
4 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
The questions contained in both licensing exams are pulled from a bank of approximately 2,000
questions based on the subject areas noted in Figure 2 later in this chapter. This is also how this prep
book is structured.
Both the salesperson and broker licensing exams are pulled from the same pool of questions,
although the questions appearing on the broker exam are generally more difficult (and a higher
grade is required for passing: 70% for salespersons, 75% for brokers).
The DRE licensing exam is updated frequently to reflect changes in real estate law and practice.
However, the underling core principles covered on the exam are fairly static. It has been reported
that questions which more than 85% of the applicants answer correctly are dropped from the DRE
licensing exam.
Editor’s note – The DRE licensing exam will cover a variety of concepts based on those listed in
Figure 2. However, not all of the content is guaranteed to be included on the DRE licensing exam.
Both the salesperson and broker DRE licensing exams are multiple choice, with an A, B, C or D answer
choice provided. You are to select the answer selection which most accurately answers the question
provided.
Electronic DRE licensing exams are designed to be highly intuitive. Upon signing in at the test
location, you are given a computer mouse which corresponds to the computer terminal on which
you are to take the DRE licensing exam. The computer terminal consists only of a screen with no
keyboard.
The exam question appears in the center of the screen. On the left side of the screen, you are presented
with a numerical list of all the exam questions, 150 for the salesperson DRE licensing exam and 100
for each session of the two sessions of the broker DRE licensing exam. Next to each number is a white
box, which is filled once an answer is selected.
You may select any of the exam questions on the left side of the screen to activate that question.
Thus, the electronic DRE licensing exam offers a high degree of flexibility, allowing the applicant
to answer the exam in any sequence they choose, skip questions and return to them at a later point
in time and see which questions are still left to be answered.
Some DRE licensing exam questions are structured in a complete-the-sentence format, leaving you
to select which answer selection best completes the question. This type of structure is frequently
used to test the comprehension of real estate vocabulary. [See the Real estate glossary of critical
real estate terms likely to appear on the state exam in the back of this book]
Other questions are structured in a fill-in-the-blank format. An incomplete sentence is provided and
you are to select the missing term(s) which best completes the sentence.
Alternatively, some questions provide a scenario or fact situation, requiring you to determine
which answer selection most accurately describes the scenario presented or its outcome. This type of
structure is frequently used to test an applicant’s understanding of agency relationships, and what
type of duties are owed to what participant in a transaction. [See Chapter 10: Real estate scenario
questions]
Critical facts regarding the DRE licensing exam 5
123
$ Covers: Law, Definition and Nature of Agency Relationships, Types of Agencies,
and Agents, Creation of Agency and Agency Agreements, Agency Supervision,
Responsibilities of Agent to Seller/Buyer as Principal, Disclosure of Agency,
x Disclosure of Acting as Principal or Other Interest, Termination of Agency,
Commission and Fees, Responsibilities of Agent to Non-Client Third Parties
123
x
$ Property Valuation and Financial Analysis- Approximately 14% of exam
Covers: Value, Methods of Estimating Value, Financial Analysis
$ 123
Financing- Approximately 9% of exam
Covers: Types of Loans, Sources of Financing, Government Programs, Mortgages/
$ Deeds of Trust/Notes, Financing/Credit Laws, Loan Brokerage, Types of Loan
x
Originators
123
Transfer
x of Property- Approximately 8% of exam
Covers: Title Insurance, Deeds, Escrow, Tax Aspects, Special Processes, Transfer
through Court Supervision, Types of Vesting
123
123 Practice of Real Estate and Disclosures - Approximately 25% of exam
Covers: Trust Account Management, Fair Housing Laws, Truth in Advertising,
$x x
Record Keeping Requirements, Permitted Activities of Unlicensed Sales Assistants,
DRE Jurisdiction and Disciplinary Actions, Licensing, and Continuing Education
Requirements and Procedures, California Real Estate Recovery Fund, General
Ethics, Technology, Property Management, Commercial/Industrial/Income
Properties, Specialty Areas, Transfer Disclosure Statement, Natural Hazard
Disclosure Statements, Disclosure of Material Facts Affecting Property Value,
Need for Inspection and Obtaining/Verifying Information, Reports, Servicing
Diverse Populations
123
Contracts- Approximately 12% of exam
Covers: Listing Agreements, Buyer Broker Agreements, Offers/Purchase Contracts,
Agreements, Promissory Notes/Securities, Purchase/Lease Options, Advanced
x Fee
6 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Both the salesperson and broker licensing DRE licensing exams are Pass or Fail. If you pass, you are
not informed of your final numerical score, only that you passed.
If you fail, you will be notified of your score and the percentage of questions correctly answered in
each of the subject areas. Thus, if you do not pass, you will be informed of the specific subject area(s)
you need to study in greater detail before applying to take the exam again.
Those who do not pass may apply to retake the DRE licensing exam.
If you fail, you may apply to retake the DRE licensing exam using the eLicensing Online System.
You may retake the exam as many times as needed during the two-year period following the date of
the filing of the original application.
EXAM SECURITY
To maintain the integrity of the DRE licensing exam, the following items are not permitted in
the exam room: briefcases, suitcases, backpacks, food or drink, study materials, portable computers,
PDA’s, or personal calculators. Cell phones are also prohibited during the exam and while on break.
Editor’s note – Nonprogrammable calculators and a small white board pen are provided at the test
location.
You may not retain a copy of the DRE licensing exam questions or your answers after the exam
session has ended.
Test taking and pre-exam study tips 7
Key terms specific to a given area of real estate practice are listed at the beginning of each chapter
in this book. These Key terms are critical to your comprehension of the topics contained within that
section and your ability to correctly answer the sample questions covering that topic. A majority of
the sample questions in this book will test your knowledge of these critical Key terms and put these
principles in context.
Further, each section contains a list of Exam jargon consistent with the subject matter of that
chapter. Exam jargon is highly specialized real estate terminology unique to the industry that has a
strong likelihood of appearing on the exam.
Mark your answers on a separate piece of paper as opposed to in the book. This way, you may take
the practice exams numerous times.
After you complete the exam, use the answer key provided to check your level of comprehension
and return to the questions which caused you the most trouble.
When the real licensing exam is being taken, you will be prepared to finish it faster than is necessary
– providing you with the opportunity to review your answers before you submit the exam.
For instance, the salesperson exam contains 150 questions and you have three hours and fifteen
minutes to complete it. Thus, you have more than one minute to answer each question. If you
answer questions in one minute on average, you will have 45 minutes to go back and review the
more difficult questions before the time is up.
Both methods help solidify foreign concepts in the brain, translating abstract and impersonal ideas
into something more relatable and easy to recall.
This will also acquaint you with the DRE’s phrasing of certain concepts and discussions – phrasing
and language which will be highly similar to that used on the exam and in this material.
Test taking and pre-exam study tips 9
Stay informed.
Keep current on real estate news that is happening today. A larger awareness of what’s happening
in real estate now will provide a real world application to your studies, translating academic
concepts into tangible experience. This knowledge will function as glue binding all the disparate
study topics together.
Get in the habit of following real estate news now – your future job performance and livelihood will
depend on it.
The more recently the licensee took the exam, the better as their recollection is freshest.
Write it down.
The physical act of writing down information helps in its retention. Physically engage with your
materials. Make extensive notes of all the material you are not familiar with on a separate sheet of
paper, highlight key passages in this prep book and make notes in the margins to provide you with
a road map for future study.
Use flashcards.
Create your own real estate flashcards using the terms and definitions provided in the
Real estate glossary at the back of this book or purchase existing physical or digital
flashcards. Start by learning ten real estate terms then add ten more terms every day.
During each study session, review the ten new terms and all the previous terms which
came before them. Continually expand your real estate vocabulary.
10 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Further, a general understanding of the layout of the DRE’s website will prove useful once you
become licensed as you will return to it with some frequency.
Remember: the earlier you arrive, the more time you have to cram before the test begins.
Refrain from alcohol or caffeine the night before to ensure a clear mind in
the morning.
You may also consider staying in an accommodation within walking distance of the testing center
the night before the exam. Sit in the quiet stillness of the room the night before and mentally prepare
for the exam free from all distractions of the home. In the morning, after a light breakfast, simply
walk to the center and arrive rested, alert and confident.
Make it real.
Having a hard time grasping some of the concepts? Make them personal.
Instead of considering the concepts only as they appear in the book, visualize them in a real world
context more familiar to you: What was your experience when you purchased your own home?
What disclosures did you receive? What kind of mortgage do you have? If you were to conduct an
appraisal of your house, what method would you use and what do you believe is its fair market
value (FMV)? What is the architectural style of your neighbor’s house? What steps would you take to
list a house for a friend?
By making these concepts real, they have a greater chance of being understood at a deeper level –
and retained for when you take the exam.
Test taking and pre-exam study tips 11
If you’ve seen a similar question on a practice exam or quiz, do not assume the
question is exactly the same on the licensing exam. The exam question may be
phrased in the positive, when the question you previously saw was phrased in the
negative, or it may be asking you to answer a different facet of the concept.
Do not try to anticipate the intent of the exam question, read only what you see and look for the
key word to eliminate the distractions. Determine what the question is actually asking and do not
assume it is a straight reproduction of an exam prep question.
Answer what is written – do not assume any facts outside of the question.
Answer the questions exactly as they are written. Every question is its own self-contained universe,
and everything you need to answer it will be contained in the question itself.
Do not try to argue with a question or change its wording. Leave your personal anecdotes at the door
and answer the question based on its content, not your opinions about it.
Regardless of the length or complexity of any single question, all questions on the exam are given
the exact same weight and importance. Thus, do not invest a disproportionate amount of time into a
single irksome question (e.g., a math question), unless you have already answered all the others first.
• third time: answer all those challenging questions which require further deliberation, such
as those involving mathematical computations or written in the negative. Remember, a math
question that has several sequential steps to perform is still only worth one point, the same as
any other question. Thus, save the more complex questions for last.
This will equip you with a ballpark amount for the correct answer, enabling you to eliminate the
distractors that are drastically outside of this estimated amount and avoid common calculator errors.
Keep common sense magnitude in mind: the size of an average house might be 2,000 square feet –
not 200 or 20,000.
$
If it is the correct answer selection, the question and answer will be logically consistent. If you
plug the incorrect answer selection into the question, its internal consistency will be broken.
Be comfortable.
Wear comfortable clothing to the exam and bring a sweater. If the air conditioning is blaring, put
on an extra layer of clothing to avoid the distraction of physical discomfort. Anything that overcomes
anxiety or discomfort should be done unless specifically not allowed by DRE.
x
Even if you’re good at mental math, let the calculator remove all possibility for error.
Think of it as confirming what you already know.
Test taking and pre-exam study tips 13
For example, budget 45 minutes each for questions 1-37, 38-75, 76-113 and 114-150. This will divide
the exam into manageable quarters (and provide you with 15 extra minutes to go back and double-
check your work at the end).
When presented with very similar answer selections, one is likely correct.
It is unlikely that you will encounter two similar distractors for the same question. If you see two
answer selections with very similar wording with the exception of just one or two words, one of
these answer selections is likely correct.
If you do not know the correct answer and have to make an educated guess, by eliminating the two
outlier distractors, you will have a 50%-50% chance of answering the question correctly.
14 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
If you are stuck on a question, review the exam for other questions covering a similar subject matter
and see whether these questions provide any clues regarding the answer of the question causing
you trouble.
Think of the exam as an elaborate crossword puzzle in which you can use answered
questions to fill in the blanks of your remaining questions. When in doubt, become
a detective, scouring the exam for clues which may shed light onto the question at
hand.
It is a matter of human nature to make the occasional mistake; mathematical, clerical, conceptual
or otherwise. Thus, take the time to go back and review the exam after it is complete to ensure
simple errors, such as incorrect math or use of a vocabulary term, are remedied before it is submitted.
However, changing an answer should be done for a valid reason. Otherwise, stick with your original
inclination.
It is also helpful to use the white board to write out equations for math questions (though a calculator
is also provided).
This is your last chance to go back and review your answers. If you have any time left
and are not 100% confident in all of your answers, use it.
Test taking and pre-exam study tips 15
If you’re taking the broker licensing exam, you will be provided with a break between test sessions
which is not deducted from your total testing time.
Pretend the DRE is infallible – the correct answer will not contain a mistake.
If you’re reviewing the answer selections and multiple seem correct, check all of your answer
selection options to determine whether an “All of the above” or “Both a. and b.” response is available.
It is not uncommon for multiple answers in a row to be located in the same column or be the
same letter. Do not arbitrarily change your answers solely to break a pattern you may perceive is
developing, as these patterns are the result of pure chance.
If absolute language is used in the question, the correct answer selection must be correct ALL of the
time (or NONE of it) – no exceptions.
16 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Further, if one of the answer selections is incorrect and “All of the above” is provided as an answer
selection, it cannot be correct and thus is not to be selected. This is also the case for “Both a. and b.”
answer selections if either answer selection “a.” or “b.” is clearly incorrect.
? guess.
A one-in-four shot is better than failing to answer the question at all, which is certain to
score no points.
Use the tips provided here and exercise common logic to eliminate as many distractors you can.
Examine the language of the question and avoid all answer selections which are not grammatically
correct. Choose an answer selection which is closely related to another answer selection, eliminating
the two choices that are very different. Scan the whole exam for clues which will help you answer
the question causing you grief.
Relax, stay calm and remember: missing thirty or forty questions won’t
prevent you from passing.
Chapter 1: Property ownership and land use controls and regulations 17
Key Terms
Fundamental real estate vocabulary likely to appear on the state exam with reference to the
quiz questions illustrating its application. See the Real estate glossary on page 331 for the full
definitions.
adverse possession (q. 36) hypothecate (q. 28) solar easement (q. 45)
appurtenance (q. 37) ingress and egress (q. 44) Subdivided Lands Law (q. 46)
easement (q. 17, 34) life estate (q. 30) Subdivision Map Act (q. 11)
eminent domain (q. 21) lis pendens (q. 19, 35) tenement (q. 43)
encroachment (q. 47-48) police power (q. 8-10) township (q. 6)
encumbrance (q. 31-35) reversion (q. 26) zoning (q. 8, 10)
escheat (q. 4, 20, 21) riparian rights (q. 12)
estate (q. 38-42) section (q. 5)
Note: This section is designed to give you a broad understanding of the basic principles which
relate to the subject matter of this chapter. However, it is not exhaustive. For further reading on
this concept, see your Real Estate Principles licensing course materials.
18 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Property is anything which can be owned. In turn, ownership is the right to possess the property
owned and use it to exclude others from entry.
The right to possess and use property includes the right to:
• occupy;
• sell or dispose;
• encumber; or
• lease the property.
Next, the classes of property are divided into two primary categories:
• real estate, sometimes called real property; and
• personal property, sometimes called chattel.
Real estate is immovable and illiquid. Personal property is movable and defined, by way of
exclusion, as all property which is not classified as real estate. Both real and personal property can
be hypothecated, i.e., used as collateral for a loan while the owner retains ownership of the asset.
Personal property is transferred by a bill of sale signed by the seller. A search of public records will
NOT show title to personal property, but will for real estate.
Bundle of rights go with the land and are real property. Appurtenances, incidental rights in
adjoining property such as stock in a mutual water company, are real property as well. Crops can
be real when, like a fruit tree, they remain after harvesting the fruit. However, crops are generally
considered personal property when they are planted annually. Crops are also personal property
when they are harvested, mortgaged or sold.
Property characteristics
The physical components of real estate include:
• the land;
• anything affixed to the land, such as a fixture;
• anything appurtenant to the land; and
• anything which cannot be removed from the land by law.
Real estate includes buildings, fences, trees, watercourses and easements within a parcel’s horizontal
and vertical boundaries. Anything below the surface, such as water and minerals, or above the
surface in the air space, such as timber, is part of the real estate.
Chapter 1: Property ownership and land use controls and regulations 19
A fixture is a personal property item which has become permanently attached to the real estate.
When personal property becomes a fixture, it is part of the real estate and is thereafter conveyed with
it.
Trade fixtures, which are used to render services or make products for the trade or business of a
tenant, are always personal property. The primary component of real estate is land. Land includes:
• soil;
• rocks;
• other materials of the earth; and
• the reasonable airspace above the earth.
Improvements are the structures built upon land, including residential and commercial properties
consisting of:
• foundations, generally built as slab foundations or as footings supporting
APPRAISAL floor
AND VALUATION
APPRAISAL joists and
AND VALUATION
subflooring containing a crawl space below it;
• framing, consisting of: ROOF TYPES
ROOF TYPES
° joists and headers which are horizontal; APPRAISAL
APPRAISAL AND AND VALUATION
VALUATION
Figure 1 ROOF
ROOF TYPES
TYPES
Roof Styles
SINGLE
SINGLE DORMERS
DORMERS SHEDSHED DORMER,
DORMER,
or DUSTPAN
or DUSTPAN
SINGLE DORMERS SHED DORMER,
SINGLE DORMERS SHED DORMER, GAMBREL GABLE
or DUSTPAN GAMBREL GABLE
or DUSTPAN
MANSARD
MANSARD HIP HIP
GAMBREL
GAMBREL GABLE
GABLE
PYRAMIDPYRAMID FLAT FLAT
MANSARD HIP
MANSARD
Mansard HIP
Hip Pyramid Flat
Building Quality
Building Quality
One of theOnemostof important
the most reasons
PYRAMID
importantPYRAMID
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20 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Encumbrances
Easements are the right to enter or use another’s land as an encumbrance on their title. A dominant
tenement benefits from the easement. The servient tenement is burdened by the easement.
Easements are classified as:
• prescriptive, a right of access gained through use;
• appurtenant, the right to cross or use a property which runs with the property as an interest
held in the burdened real estate. For example, a buyer of real estate in which the seller
possessed a dominant tenancy would gain that same right over the servient property when
either property is transferred; and
• in gross, which belongs to an individual, not land, as their personal right in the burdened
real estate, generally applied to a utility company.
Other interests in real estate can be created, such as liens. Liens are interests in real estate which
secure payment or performance of a debt or other monetary obligation. A trust deed loan or local
property taxes are examples of liens. On nonpayment of a lien amount, the lienholder can force the
sale of the real estate to pay off and satisfy the lien.
Types of ownership
The ownership interests a person may hold in real estate are called estates, classified as:
• fee estates, sometimes referred to as inheritance or perpetual estates; and
• life estates.
The owner of a freehold estate owns the fee title to a parcel of real estate. Fee title properties are
held in perpetuity while life estate properties are held for a finite period of time.
On the state exam, condominium questions will refer to air space and PUD questions will refer to
common areas.
In commercial real estate, rental payments may be arranged in different ways. A gross lease states
that the rental amount includes all property expenses while a net lease states the tenant will be
obligated to pay certain property expenses such as taxes, insurance and maintenance. A percentage
lease states that rental payments will equal portion to the sales or income generated by the business
of the tenant occupying the space.
• The security deposit on a residential rental is limited to two months’ rent on an unfurnished
unit and three months’ rent on a furnished unit. Any unused security deposit needs to be
returned within 21 days of the tenant’s surrender of the premises.
Descriptions of property
Specific property may be described in a variety of ways:
• metes and bounds, which sets forth all the boundary lines together with their terminal
points and angles. Metes (length or measurements) and bounds (boundaries) description is
generally used when a great deal of accuracy is required.
• lot, block, tract, based on a recorded subdivision map; and
• government survey, broken into a series of sections and townships. There are numerous
questions on the state exam related to the size and location of sections, as well as the number
and location of the three baseline and meridian systems in California, consisting of:
° Humboldt (north);
° Mt. Diablo (central); and
° San Bernardino (south).
Eminent domain is the right of the government to take private property for public use. However, the
government must pay the owner the fair market value (FMV) of the property taken. The process of
using the power of eminent domain is called condemnation.
Similarly, escheat occurs when property reverts to the state government when someone dies with
no will or heirs. There is no compensation and only the state government may acquire property
through escheat, never an individual.
Chapter 1: Property ownership and land use controls and regulations 23
Public controls
Just as police power relates to government control of public health and safety, zoning and building
codes relate to government control of real estate development.
New construction is built in conformance with public controls. Public controls are enacted
through:
• state codes and regulations;
• zoning ordinances;
• local general and master plans; and
• building codes.
The Real Estate Commissioner administers the Subdivided Lands Law. The Subdivided Lands Law
protects buyers from misrepresentation or fraud in the initial sale of a subdivided property of 160
acres or less.
A subdivision, which includes land, common interest developments (CIDs) and timeshare projects,
cannot be sold in California until the real estate Commissioner issues a public report to be made
available to buyers. The public report provides critical disclosures and information.
The Subdivision Map Act has to do with the physical aspects of a subdivision (locally controlled
through general plans and planning commissions). The Subdivision Map Act is a California
subdivision law setting forth the conditions for approval of a subdivision map and requiring
enactment of subdivision ordinances under which local governments control the types of subdivision
projects which may be undertaken and the physical improvements to be installed in an area.
Court procedures and judicial actions also relate to public controls, including:
• quiet title action, which clears a cloud from a property’s title, known as perfecting the title;
• probate, a judicial proceeding to satisfy debt and properly distribute assets after a property
owner’s death;
• adverse possession, a method of acquiring title to real property through possession of the
property by a person other than the owner of record for a period of five years in an open,
notorious manner;
• intestate succession, when a property owner with heirs dies with no will, title is transferred
through an order of the probate court; and
• execution sale, when a property is sold to satisfy a judgment.
In regards to land use controls and regulations, a negative declaration regarding a proposed
development means a subdivision does no harm to the environment.
Flooding, an environmental hazard, is considered “frequent” when it occurs more often than once
every ten years.
24 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Private controls
Private controls are limitations on an owner’s use of their property created by those other than the
government, such as a developer or homeowners’ association (HOA).
Water rights
Water is characterized in one of two categories based on its physical location relative to a parcel of
real estate:
• surface water, consisting of watercourses, lakes, springs, marshes, ponds, sloughs, and any
other water flowing over the surface of the earth caused by rain, snow, springs or seepage; or
• ground water, consisting of percolating, subterranean bodies of water located in underground
basins.
Holders of rights to withdraw surface waters are said to have riparian rights, and are called
riparian landowners. Holders of rights to pump ground water are said to have overlying rights,
and are called overlying landowners.
Legal rights to extract and use water are based on priorities and are classified as:
• landowner’s rights consisting of both riparian and overlying rights;
• appropriative rights to withdraw water under license from the state; and
• prescriptive rights to withdraw water legally entitled to be used by others.
Alluvium refers to the boundary of a property that has changed due to the relocation of a river
or stream. Accession is the physical addition to property through man-made efforts or by natural
forces. Similarly, accretion is accession by natural forces only and refers to the gradual accumulation
of additional layers of soil. Avulsion is the sudden decrease or increase of the earth on a shore of
an ocean or stream resulting from the action of the water, such as occurs during a severe storm.
Reliction is the gradual recession of water leaving land permanently uncovered.
Littoral rights refers to the property rights of a property bordering a pond, lake or ocean.
Additional words that apply to riparian rights are referenced in the Exam Jargon section in this
chapter, and are defined in the glossary at the back of this book. You can expect the state to ask you
about these.
A general plan sets forth acceptable land uses within a jurisdiction, including a statement of
development policies on:
• land use;
• circulation patterns;
• housing;
• conservation;
• open space;
• noise; and
• safety.
Special categories of land may include:
• timeshares;
• resorts; and
• rural subdivisions.
Exam Jargon
Specialized real estate terminology related to property ownership and land use controls and
regulations. See the Real estate glossary on page 331 for the full definitions.
SAMPLE QUESTIONS
1. The first component of real estate is land, which includes:
a. soil. c. reasonable airspace above the earth.
b. rocks. d. All the above.
2. The northeast 1/4 of a section contains:
a. 160 acres. c. 10 acres.
b. 320 acres. d. 40 acres.
3. How many square feet are in three acres of land?
a. 130,680 c. 143,560
b. 217,800 d. 43,560
4. All of the following are acceptable means to obtain title, except:
a. grant. c. adverse use.
b. escheat. d. descent.
26 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
26. Placing two or more contiguous units under common ownership for the purpose of increasing
the value is known as:
a. dual ownership. c. plottage.
b. severalty ownership. d. reversion.
27. Which of the following is shown on a plot map?
a. Thickness of exterior walls.
b. Topography of the surrounding area.
c. Location of the improvement on the lot and its relationship to surrounding features.
d. Foundation features and construction materials.
28. Personal property may not:
a. become real property. c. be alienated.
b. be hypothecated. d. None of the above.
29. The physical components of a subdivision are controlled by the:
a. Department of Real c. Department of Architecture.
Estate (DRE).
b. city or county planning commission. d. Division of State Lands.
30. Mary held a life estate for her lifetime in a single family residence. She leased the residence to
Martha for a five-year period, but died a few weeks after the lease began. The lease was:
a. invalid on its face, because the holder of a life estate does not have the right to lease
the property.
b. continued in effect for the full five-year term.
c. valid only during the life of the lessor (Mary).
d. valid only if Martha was unaware of the life estate when the lease was created.
31. What notice is filed first in regards to a mechanic’s lien?
a. Notice of Nonresponsibility. c. Notice of Completion.
b. Notice of Cessation. d. Notice to Perform or Quit.
32. A subcontractor uses a __________ to notify a general contractor or the owner of their right to
record and foreclose a mechanic’s lien against property when they are not paid.
a. Notice of Default c. 20-day preliminary notice
b. Right of First Refusal d. 30-day Notice to Vacate
33. All of the following are examples of specific liens, except:
a. A property tax lien. c. A judgment for punitive money
damages.
b. A blanket mortgage. d. A mechanic’s lien.
34. Which of the following is a lien?
a. A recorded notice. c. An easement.
b. A homestead. d. An attachment.
35. If a lien covers all properties of the debtor in that county where it is recorded, it is known as a:
a. lis pendens. c. general lien.
b. specific lien. d. mechanic’s lien.
Chapter 1: Property ownership and land use controls and regulations 29
36. All of the following are required by an occupant to establish title by adverse possession, except:
a. they have occupied the property in a way which constitutes no notice to the record
owner.
b. the payment of taxes for five years.
c. open and notorious use.
d. hostile use.
37. All of the following are appurtenances that go with the land, except:
a. Buildings. c. Fences.
b. A swimming pool. d. A trade fixture.
38. Ownership rights and interests in real estate are called:
a. land sales contracts. c. liens.
b. estates or fees. d. tenancies.
39. Which of the following is an example of a freehold estate?
a. Beneficiary interest. c. A life estate.
b. An estate at sufferance. d. An estate at will.
40. All of the following are less-than-freehold estates, except:
a. An estate for years. c. A life estate.
b. Leasehold interest. d. An estate at sufferance.
41. Which of the following best describes an estate of indefinite duration?
a. Estate for years. c. Periodic tenancy.
b. Life estate. d. Estate of inheritance.
42. In what way is a tenant in an apartment like an owner of a condominium?
a. Both hold a fee interest.
b. The owner of the condominium and the tenant of the apartment each have an estate
in real property.
c. The local tax assessor needs to assess each property separately.
d. Both have ownership of an individual unit.
43. The word “tenancy” in real property law most nearly means:
a. life tenant.
b. the method or mode of holding interest to real property by the lessee or owner.
c. the landlord-tenant relationship.
d. the right to freely sell a property to another in the open market.
44. Appurtenant rights include the right of ingress and ___________ across adjoining properties.
a. trespass
b. traversal
c. egress
d. pro rata
45. Easements which restrict an owner’s ability to maintain or construct improvements interfering
with a neighbor’s solar energy system are known as easements.
a. airborne c. galactic
b. solar d. greenway
30 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
46. The Real Estate Commissioner, under the Subdivided Lands Law, is initially concerned with
which court:
a. Small Claims. c. Federal Supreme.
b. Superior. d. State Appeals.
47. An encroachment is:
a. a fence built on an owner’s property for security and privacy purposes.
b. an improvement on real estate, such as a building, fence, driveway or tree, which
extends onto a neighbor’s real estate.
c. a doctrine used by property owners to establish boundary lines.
d. an exclusive right-to-use easement.
48. Upon moving into the home they had just purchased, the owner discovered their neighbor’s
garage encroached four feet over his property line. lf a friendly settlement cannot be negotiated,
the owner may sue the:
a. escrow company.
b. title company.
c. agent, for failure to disclose the encroachment.
d. neighbor, since the encroachment is a trespass.
49. Lead-based paint was banned by the Federal Consumer Product Safety Commission in:
a. 1940. c. 1978.
b. 1973. d. 1996.
50. Environmental hazards located on a property which pose a direct health threat to occupants
include toxic mold and:
a. building materials containing asbestos.
b. recent seismic activity.
c. carbon dioxide gas.
d. very high fire hazard severity zones.
51. The Williamson Act provides property tax relief for owners of farmland and open, undeveloped
land in exchange for a __________ that the land will not converted to another use.
a. two-year agreement c. ten-year agreement
b. five-year agreement d. twenty-year agreement
ANSWER KEY
1. d — Land is inclusive of all listed answer choices.
2. a — There are 640 acres in a section. Divide this by four to find the area of a quarter section, 160
acres.
3. a — An acre of land contains 43,560 square feet. Thus, three acres of land equals 130,680
square feet. The conversion of acreage to square feet is the most common type of math question
on the state exam.
4. b — An individual may not obtain title by escheat. Only the state government may acquire
title through escheat.
5. c — The three baseline and meridian systems in California are Humboldt, Mt. Diablo and
San Bernardino.
Chapter 1: Property ownership and land use controls and regulations 31
31. a — An owner may prevent the attachment of a mechanic’s lien by recording and posting
a Notice of Nonresponsibility within ten days after they become aware of tenant-contracted
improvements.
32. c — Before a subcontractor employed by a contractor may record a mechanic’s lien against
real estate and enforce it by foreclosure, they perfect their lien rights by serving a 20-day
preliminary notice.
33. c — A judgment for punitive money damages is filed against an individual rather than a
specific property.
34. d — A lien always has a dollar value. Therefore, the only correct answer is the attachment.
35. c — As the lien attaches to multiple properties owned by the debtor, versus a specific property,
it is referred to as a general lien.
36. a — This question is phrased in the negative. All other answer choices are conditions that need
to be met to establish title by adverse possession. Tip: the answer choices in this question
may provide the answer for later exam questions on this topic.
37. d — This question is phrased in the negative. Trade fixtures are personal property and do not
go with the land.
38. b — Ownership might be a fee title or a life estate. Both are examples of a freehold estate.
39. c — A life estate is an example of a freehold estate.
40. c — Freehold is ownership. Less-than-freehold is a leasehold.
41. d — An estate of inheritance is a fee title. Therefore, it lasts in perpetuity — an indefinite
time.
42. b — The question asks for what the owner and a tenant have in common. Both interests held
by an owner and tenant are described as an estate.
43. b — As with the term “estate,” both the owner’s position as well as the lessee’s may be described
as a “tenancy.”
44. c — Access rights include both egress and ingress (entering and exiting), such as with a
driveway easement.
45. b — Solar panels are generally located on the roof of a structure. A solar easement prohibits
the blocking of those panels from exposure to the sun.
46. b — The Subdivided Lands Law is controlled by the Department of Real Estate. Since this
is a state entity, the process of elimination excludes the Small Claims, Federal Supreme and
Appellate courts, leaving the Superior Court as initially handling real estate disputes.
47. b — Encroachment is an example of trespass.
48. d — The neighbor is the one who is trespassing and is the party the owner may sue.
49. c — Under federal law, a lead-based paint disclosure is required on all single family
residential property built prior to 1978.
50. a — Building materials containing asbestos pose a direct health threat to occupants. Seismic
activity and very high fire hazard severity zones are natural hazards occurring off of a
property and are not man-made environmental hazards. Carbon dioxide gas is formed during
respiration and is vital to sustaining life on earth. It is also not an environmental hazard.
51. c — The Williamson Act, also known California Land Conservation Act of 1965, provides
property tax relief to owners of farmland and open-space land in exchange for a ten-year
agreement the land will not be developed or converted to another use.
Chapter 2: Laws of agency and fiduciary duties 33
Key Concepts
Critical real estate concepts equaling approximately 17% of the state licensing exam.
• Law, definition and nature of agency • Disclosure of agency
relationships, types of agencies and • Disclosure of acting as principal or
agents other interest
• Creation of agency and agency • Termination of agency
agreements • Commission and fees
• Responsibilities of agent to seller/buyer • Responsibilities of agent to non-client
as principal third parties
Key Terms
Fundamental real estate vocabulary likely to appear on the state exam with reference to the
quiz questions illustrating its application. See the Real estate glossary on page 331 for the full
definitions.
advance fees (q. 26) disclosure (q. 5) power of attorney (q. 33)
agency (q. 7) discriminatory practices protected group (q. 34)
agency creation (q. 9, 15-16, (q. 49) Real Estate Law (q. 3)
37) dual agency (q.17, 42) Real Estate Recovery
Agency Law election of agency Fund (q. 35)
Disclosure (q. 18, 19) relationship (q. 8, 13) redlining (q. 12)
agency termination (q. 14) Equal Credit Opportunity referral fee (q. 38)
altering contract (q. 24) Act (q. 48) single agency (q. 25)
Civil Rights Act (q. 45-46) ethics (q. 29) steering (q. 36)
commingling (q. 2, 4) fiduciary duty (q. 11, 20-23, 50) trust account (q. 43)
conflict of interest (q. 27) general duty (q. 30) trust funds (q. 44)
contingency (q. 47) implicit discrimination (q. 32) Unruh Civil Rights Act (q. 45)
conversion (q. 28) kickback (q. 31)
Department of Real Estate licensed activities (q. 10)
(DRE) (q. 40-41) misrepresentation (q. 1)
34 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Note: This section is designed to give you a broad understanding of the basic principles which
relate to the subject matter of this chapter. However, it is not exhaustive. For further reading on
this concept, see your Real Estate Principles and Legal Aspects licensing course materials.
An agent is generally described as one who is authorized to act for or in place of another person.
Thus, agent is an individual or corporation who represents another, called the principal, in dealings
with third persons.
The representation of others undertaken by a real estate broker is called an agency. In real estate
transactions:
• the agent is the real estate broker retained to represent a client for the purposes hired;
• the principal is the client, such as a seller, buyer, landlord, tenant, lender or borrower, who
has retained a broker to sell or lease property, locate a buyer or tenant, or arrange a real estate
loan with other persons; and
• third persons, also known as customers, are individuals other than the broker’s client, with
whom the broker has contact as an agent acting on behalf of their client.
The seller’s broker is an agent for the seller, and is also known within the industry as a listing broker.
The buyer’s broker is known as a buyer’s broker. However, peculiar to real estate brokerage, the
buyer’s broker is also known as the selling broker.
Legally, a client’s real estate agent is defined as a real estate broker who undertakes representation
of a client in a real estate transaction. Thus, a salesperson is legally an agent of the agent (their
employing broker).
The buyer’s broker might find their agency complicated by also having a listing with the seller of the
property their buyer is making an offer on. Thus, the broker becomes a dual agent. The dual agency
relationship arises when a broker represents both parties in a transaction concurrently, e.g., both the
buyer and the seller. The existence of a dual agency needs to be promptly disclosed to each client.
Alternatively, a single agent represents only one party, such as an individual buyer or seller.
A subagent is an individual who has been delegated agency duties by another agent of the client,
not the client themselves.
Chapter 2: Laws of agency and fiduciary duties 35
The Real Estate Law controlling the conduct of participants in the real estate industry is found in
the Business and Professions Code. The Department of Real Estate (DRE) oversees, regulates,
administers and enforces the real estate law as practiced by licensees. The DRE was formally known
as the California Bureau of Real Estate (CalBRE) prior to July 2018.
The Real Estate Recovery Fund, also known as the Consumer Recovery Account, is available to
individuals who have obtained a final-court judgment against a real estate licensee for losses caused
while acting as an agent and are unable to recover the judgment from the licensee. [See Chapter 6]
To avoid ambiguity and protect their fee, a broker’s representation of a client is properly undertaken
on a written employment agreement signed by both the client and the broker. A written
employment agreement is necessary for the broker to have an enforceable fee agreement. This
employment contract is loosely referred to as a listing agreement.
The broker’s agency can also be created by an oral agreement or conduct of the client with the broker
or other individuals. However, fee arrangements are unenforceable if no written agreement exists.
When a broker uses client funds for personal purposes, this is known as conversion. The mixing
of personal funds with client or other third party funds required to be held in trust is known as
commingling. [See Chapter 6]
Disclosure of agency
The real estate agency disclosure law addresses two separate sets of agency-related matters in
real estate transactions:
• an Agency Law Disclosure setting out the “rules of agency” which control the conduct of
real estate licensees when dealing with the public in an agency capacity; and
• an agency confirmation provision, contained in documents signed by principals used to
negotiate the purchase or leasing of real estate and lease agreements with a term exceeding
one year, declaring the agency relationships undertaken by each of the brokers with the
participants in the transaction.
The Agency Law Disclosure needs to be presented to all parties when listing, selling, buying or
leasing for a term greater than one year:
• single family residential property;
• multi-unit residential property with more than four dwelling units;
• commercial property;
• vacant land;
• a ground lease coupled with improvements; or
• manufactured homes.
At its core, the Agency Law Disclosure form is a restatement of pre-existing agency codes and case
law on agency relationships in all real estate transactions. Agency disclosure law requires an agent
to provide the Agency Law Disclosure form as soon as practicable prior to execution of an offer to
purchase or lease.
Further, the agency relationship is disclosed in the agency confirmation provision located in all
written negotiations to purchase or lease and lease agreements.
Chapter 2: Laws of agency and fiduciary duties 37
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 5 OF 5 — FORM 150 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
17.
Signature: Signature:
Address: Address:
I agree to the terms stated above. I agree to the terms stated above.
� See attached Signature Page Addendum. [RPI Form 251] � See attached Signature Page Addendum. [RPI Form 251]
The agency confirmation
Date:
provision
, 20
states the existence
Date:
or nonexistence
, 20
of each broker’s fiduciary
agency with the various
Buyer: parties in the specific transaction
Seller: engaged in. Each broker identifies the
party they are acting on behalf of as their agent in the transaction. Thus, one broker does not state the
agency relationship
Signature:of any other broker involved in the transaction. [See Figure 1]
Signature:
Buyer: Seller:
DisclosureSignature:
of acting as principal or other
Signature: interest
A real estate licensee who acts solely as a principal REJECTION OFbuyingOFFER or selling property need not disclose the
existence of their real estate license. The disclosure of a sales agent or broker license is only required
Undersigned hereby rejects this offer in its entirety. No counteroffer will be forthcoming.
when the licenseeDate: holds themselves , 20 out as an agent in the transaction with the expectation of a fee,
not merely a principal
Name: acting for their own account.
required.
Signature:
Disclosure of a conflict, such as a dual agency situation, allows the principals to take the disclosed
bias into consideration in further discussion with the broker and in negotiations with the opposing
party.
The disclosure and consent to the dual agency does not neutralize the bias disclosed. However, it
does neutralize the element of deceit which, if left undisclosed, would be a breach of the broker’s
fiduciary duty.
38 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Termination of agency
Agency is terminated on:
• the completion of the purpose of the employment, such as the closing of escrow;
• the mutual consent of both the agent and principal;
• the expiration of its term, such as on the running of the time period given on an exclusive
listing;
• the extinction of its subject, such as the destruction of the subject property;
• the death or incapacity of the agent or principal; or
• the agent’s or principal’s renunciation of the agency, which may expose the renouncing
party to liability for damages.
However, fees are commonly structured as 6% of the price received for a property, to be split between
the buyer’s and seller’s brokers (then further divided among their agents).
For example, a seller’s agent owes a general duty of good faith and fair dealing to the buyer (but a
fiduciary duty to their client seller). A buyer’s agent owes a general duty to the seller (but a fiduciary
duty to their client buyer).
A dual agent, acting on the behalf of both the buyer and seller concurrently, owes a fiduciary duty
to both parties. Under a dual agency, both parties are entitled to advice from the agent, although the
agent may not pass on confidential pricing information to the opposing parties.
Exam Jargon
Specialized real estate terminology related to laws of agency. See the Real estate glossary on
page 331 for the full definitions.
SAMPLE QUESTIONS
1. A property owner suffers a loss because of the fraudulent misrepresentation of a broker. The
owner is advised to first:
a. file a claim with the Real Estate Commissioner.
b. file a claim with the Real Estate Education Research and Recovery Fund.
c. sue the broker for damages.
d. collect from the broker’s errors and omissions (E&O) insurance carrier.
2. Which of the following is an example of a trust fund violation?
a.Holding a deposit check uncashed prior to acceptance at the direction of the buyer.
b.Holding a deposit check uncashed after acceptance at the direction of the seller.
c.Holding a deposit check uncashed at your own discretion.
d.Failing to disclose a material defect to a buyer which negatively affects the value of a
property.
3. The Real Estate Law is part of:
a. the Corporations Code. c. the Statute of Limitations.
b. the Business and Professions Code. d. Penal Code.
4. Commingling means the opposite of:
a. subrogation. c. subordination.
b. mixing. d. separation.
5. A property owner tells the broker that the house is connected to the sewer. The broker relays
this information to the buyer, who later finds that the house has septic system in need of repair.
The buyer would sue:
a. the broker and the owner. c. the broker.
b. no one, as they should d. the owner.
have checked.
6. A salesperson representing a buyer, in selling properties listed with another broker, is directly
responsible to:
a. the selling broker. c. the listing broker.
b. the Multiple Listing Service (MLS). d. the owner.
7. A valid agency requires a(n):
a. written agreement. c. attorney-in-fact.
b. express agreement. d. None of these.
8. A listing broker may not be:
a. the sole agent of the owner. c. a sole agent of the seller.
b. the sole agent of the buyer. d. a dual agent.
9. An agency relationship would not be created by:
a. a verbal agreement. c. implication.
b. ratification. d. subrogation.
40 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
20. A seller’s agent listed a ranch for sale under an exclusive right to sell listing. A buyer’s agent,
working through the local multiple listing service (MLS), presented an offer which the seller
accepted. During escrow, the seller’s agent discovered the buyer had recently purchased many
similar ranches in the area at a far higher cost per acre than had been offered in this transaction.
What should the seller’s agent do?
a. Do nothing because the deal is in escrow.
b. Disclose all information to the seller and let the seller decide what to do.
c. Cancel the escrow on behalf of the seller and try to resell the property for a higher price.
d. Inform the seller, but insist the deal must stay in escrow.
21. Which of the following would be a fiduciary duty of the agent of the buyer?
a. Acting with the utmost care, integrity, loyalty and honesty when dealing with the
buyer.
b. Steering the buyer to ‘appropriate’ neighborhoods.
c. Telling the buyer which lender to use.
d. Communicating to the seller the maximum price the buyer will be willing to pay.
22. A real estate broker acts from a position of trust for the seller or buyer. This is described legally
as a(n):
a. fiduciary relationship. c. dual agent.
b. ostensible agent. d. independent contractor relationship.
23. A seller listed their home for sale with their broker for $400,000. The seller told their broker it
was imperative that the property be sold quickly. The seller’s broker showed the property to
a buyer and told them the seller was financially insolvent and would accept $380,000. Based
on the seller’s broker’s statement, the buyer submits a $380,000 offer which the seller accepts.
Concerning the seller’s broker’s actions, which of the following is true:
a. the seller’s broker violated their fiduciary obligation to the seller since they acted in
excess of their authority.
b. when the seller accepted the offer, the broker’s actions were vindicated.
c. the broker’s action were proper since the seller indicated they wanted an immediate
sale.
d. the broker interpreted the seller’s wishes and produced a sale accordingly. Acceptance
of the offer made the broker’s actions acceptable.
24. A seller’s broker receives a written offer on a listed property. They are certain the seller will not
accept it. All of the following are acceptable actions for the seller’s broker, except:
a. write new terms on the back of the offer and return it to the buyer for approval.
b. change the offer price to what the broker thinks the seller will accept, and initial the
change.
c. present the offer to the seller, and upon rejection, induce the seller to make a counter
offer.
d. present the offer to the seller as written.
25. In a real estate sale, when a broker represents only the buyer, this is referred to as a(n):
a. single agency. c. dual agency.
b. implied agency. d. general agency.
42 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
26. Before a broker may solicit for an advance fee, the advance fee paperwork must be submitted
to the for approval at least 10 days prior to use.
a. Department of Real Estate (DRE).
b. Secretary of State.
c. Department of Housing and Urban Development.
d. State Insurance Commissioner.
27. When a broker or their agent, acting on behalf of a client, has a competing professional or
personal bias which hinders their ability to unreservedly fulfill the fiduciary duty they have
undertaken, this is referred to as a(n):
a. conflict of interest. c. dual agency.
b. sub agency. d. violation of law.
28. A real estate broker is guilty of conversion if they:
a. acted as a dual agent without the approval of all parties.
b. split their commission with an unlicensed party.
c. used trust funds for their personal use.
d. commingled funds.
29. The best guideline to determine whether an action is ethical can be found in:
a. state legislation.
b. the Business and Professions Code.
c. the Preamble of the National Association of REALTORS®.
d. what is in the best interest of the real estate licensee.
30. Any broker negotiating a transaction as an agent for either party has a(n) to
disclose title conditions affecting ownership or use of the property to both parties, not just their
client.
a. agency duty c. fiduciary duty
b. general duty d. common law duty
31. A real estate broker sends all of their title business to Wonderful Title Co. In appreciation of
the business, the title company pays the broker $10 for each transaction. According to the Real
Estate Settlement Procedures Act (RESPA), this practice is:
a. standard business practice in the real estate industry.
b. permissible.
c. permissible if the seller is going to pay for the title services and is told about it and
approves.
d. forbidden.
32. are practices which are not openly discriminatory, but result in discriminatory effects.
a. Implicit discrimination. c. Overt discrimination.
b. Sanctioned discrimination. d. Complicit discrimination.
33. Which of the following is an attorney-in-fact?
a. A principal who has been given implied powers of agency.
b. An agent performing a dual agency.
c. A legally competent person who has been given a power of attorney to act on behalf of
another.
d. A lawyer acting as the administrator of an estate.
Chapter 2: Laws of agency and fiduciary duties 43
34. A person who is not among the protected groups under the Americans with Disabilities Act
(ADA) and can therefore be refused a rental is a(n):
a. alcoholic. c. drug addict.
b. pregnant women. d. blind individual with a guide dog.
35. A real estate salesperson’s license has been suspended because money was paid out of the
Recovery Account. Their license will not be reinstated:
a. until they pay the person any amount not paid by the Recovery Account.
b. until they pay the Recovery Account for half of the money, plus interest.
c. ever, as a suspended license may never be reinstated.
d. until they repay the Recovery Account for all money paid, plus interest.
36. When approached by members of minority groups who want to be shown property, a real
estate salesperson avoids showing the buyers property in integrated areas. This would be an
example of:
a. blockbusting. c. redlining.
b. steering. d. best business practice.
37. Which of these would create an agency relationship:
a. implication. c. express agreement.
b. ratification. d. Any of the above.
38. Admiralty Escrow offers a $100 “referral fee” to any real estate agent who opens escrow during
the month of May. Under the Real Estate Settlement Procedures Act (RESPA), such an offer:
a. is always allowed.
b. is allowed if disclosed to both the buyer and seller.
c. must be disclosed in the settlement statement.
d. is not allowed.
39. When a broker deposits their own personal or business funds in a client trust fund account,
that act is referred to as:
a. subrogation. c. conversion.
b. subordination. d. commingling.
40. The Real Estate Commissioner is authorized to:
a. impose fines on any real estate licensee who is convicted of fraudulent activities.
b. promulgate rules and regulations to enforce the California real estate laws.
c. issue non-resident real estate licenses to states which prohibit their residents from
holding California real estate licenses.
d. implement federal lending legislation to encourage a healthy housing market.
41. If a real estate broker fires a salesperson for an illegal act, the broker should inform the Real
Estate Commissioner of the firing:
a. immediately by telephone.
b. if they choose to. It is not the responsibility of the broker to inform the Real Estate Com
missioner.
c. Immediately in writing. It is unconditionally required.
d. never. It is unethical to interfere between the sales licensee and Real Estate
Commissioner.
44 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
42. Agent Andy is hired by Seller Sally to list her property for sale. Sally is under financial distress
and is motivated to sell quickly. Later, Agent Andy enters under contract to help Buyer Bill
purchase a suitable property. Agent Andy shows Sally’s property to Bill and lets Bill know
Sally is desperate to sell and will accept a bid lower than the list price. Bill promptly decides to
purchase the property. Since Bill purchased the property so quickly, Agent Andy didn’t have
the opportunity to reveal to either party that he was acting in a dual agency capacity. Which
of the following statements is least correct about this scenario?
a. Agent Andy could be subject to disciplinary action by the Department of Real Estate
(DRE).
b. Seller Sally can recover her money losses from Agent Andy.
c. Agent Andy cannot enforce the collection of a commission from Seller Sally.
d. Agent Andy can still timely disclose his dual agency status to both Seller Sally and
Buyer Bill so long as he does so in writing within three business days of closing.
43. In regards to items of value held in trust, which of the following statements is least likely to be
true?
a. Trust funds can be kept in separate interest bearing accounts.
b. Trust funds for taxes and insurance may bear interest.
c. Trust fund accounts must be insured by the FDIC.
d. Trust funds cannot take the form of precious gems or stones.
44. Who may withdraw money from a trust fund?
a. Any person employed by the broker.
b. Only salespeople in the broker’s employ.
c. A corporate director.
d. Any authorized employee of the broker.
45. If an agent discloses to their principal the race, creed, or color of a prospective buyer or tenant,
has the agent committed a discriminatory act?
a. No, since an agent is obligated to disclose to their principal all material facts that might
influence the principal’s decisions concerning any real estate transaction.
b. No, since a fiduciary relationship exists between the agent and the principal and the
agent must exercise good faith in working for the principal’s best interest.
c. Yes, since the race, creed or color of the prospect does not matter.
d. Yes, however, that disclosure violates only a state law and there is no penalty.
46. In 1968, the U.S. Supreme Court barred all racial discrimination in the sale or rental of property.
A person discriminated against should:
a. contact the local police.
b. file a criminal action in local and state courts.
c. plead the fifth.
d. file a civil action in federal court.
Chapter 2: Laws of agency and fiduciary duties 45
47. A buyer of a property had a real estate agent write up an offer to purchase a home. The offer
was contingent upon the sale of their existing home. The seller made a counter-offer accepting
the buyer’s offer, but reserved the right to continue marketing the home, seeking higher offers
and granting the buyer a right of first refusal to remove their contingency if a better offer came
in. The buyer accepted the seller’s counteroffer and immediately listed their existing home
for sale. Shortly thereafter, the seller notified the buyer’s agent that a better offer had been
received without contingencies. What should the agent advise the buyer to do?
a. Advise the buyer to get a short term bridge loan so that they can purchase the home
without first selling their existing home.
b. Immediately advise the buyer to remove the contingency and open escrow with the
seller.
c. Advise the buyer of the advantages and disadvantages of removing the contingency
and buying the home before the sale of their existing home.
d. The buyer’s agent should not offer advice to buyer on this issue.
48. All of the following are recognized purposes of the Equal Credit Opportunity Act, except:
a. Standardizing the methods for obtaining credit.
b. Regulating the printing or publishing of an advertisement for the sale or rental of
residential property that indicates a wrongful discriminatory preference.
c. Discouraging discrimination in lending based on age, sex, race, marital status, color,
religion or national origin.
d. Regulating the total amount of credit given to a borrower.
49. When a deed includes the racial identity of the parties, it can be rewritten under which of the
following circumstances:
a. when the title company rewrites it. c. if it is offensive or discriminatory.
b. it was created prior to 1968. d. by court order.
50. A real estate broker who has been appointed as a subagent for a seller, with the seller’s approval,
has a fiduciary duty to:
a. the primary agent. c. the buyer only.
b. both principals. d. the seller only.
ANSWER KEY
1. c — When a principal feels there is a grievance with a broker, they need to first pursue the
broker for damages. If unsuccessful in collecting after prevailing in court, they can then submit
the judgment to the Recovery Fund for payment.
2. c — This question concerns the person that has authority to act regarding deposits. Only the
principals can decide the proper handling of the check. Answer selection D, while a violation
of disclosure law, is not a trust fund and accounting violation.
3. b — The Real Estate Law is located in a specific state code. Not all real estate companies are
corporations, so it would not be reasonable for the law to come from the Corporations Code.
The Statute of Limitations has to do with time limits before which action need to be taken. Real
estate brokerage is considered a profession, and thus is controlled under the Business and
Professions Code.
46 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
4. d — Commingling is nearly identical to the meaning of the word mixing. Therefore, separation
would be its opposite.
5. a — In this instance, the buyer includes the owner in the suit as they are required to disclose
a septic system on the Transfer Disclosure Statement (TDS). The broker is also named since
they failed in their due diligence to be aware of the septic system.
6. a — The salesperson is always responsible to their broker. Unique to real estate, “selling broker”
refers to the buyer’s broker.
7. d — A valid agency doesn’t require any of these. It can be triggered by the actions of the
principal or agent.
8. b — The listing broker, also known as a seller’s broker, would naturally represent the seller.
They could also represent the buyer and therefore be a dual agent. They could never represent
solely the buyer.
9. d — Subrogation is the substitution of one person for another. Therefore, it would not create
an agency relationship whereas all of the others are possible.
10. d — All of those are legal actions for a broker.
11. a — Offers need to be submitted to the seller, whether only one or multiple. Any other choice
would fail in the agent’s fiduciary duty.
12. a — This is an example of redlining. Panic selling is similar to blockbusting.
13. d — An agent is a person who acts on behalf of another. Thus, an agent cannot be an agent for
themselves. Here, they are a principal acting for their own account.
14. c — Estoppel is a legal theory under which a person is barred from asserting or denying a fact
because of the person’s previous acts or words. This would not terminate an agency relationship.
All the other answer selections are valid ways to terminate an agency relationship.
15. a — The creation of agency does not require payment of a fee to be valid.
16. a — Agency requires agreement of the parties. A volunteer action by the agent without the
corresponding consent of the principal is insufficient.
17. d — In order to properly be a dual agent, the dual agency status needs to be disclosed as soon
as possible and all parties must consent.
18. a — The agency disclosure law governing agency relationships became effective January 1,
1988.
19. a — The Agency Law Disclosure is to be made as early as practical, but always before the
principal signs any contract.
20. b — The listing agent’s fiduciary duty requires them to disclose all material facts to their
client, including the existence of the other transactions.
21. a — Answer choices B and C are wrong since they work against the concept of the client as the
decision maker. Answer selection D is clearly wrong as it is improper to reveal confidential
pricing information to the opposing party. Only A meets the requirement of fiduciary duties.
22. a — The relationship is described as fiduciary. None of the other answer selections describe a
relationship of loyalty and trust.
23. a — This activity is a violation of the fiduciary duty regardless of the later actions or results.
24. b — Changes and counteroffers must be made by the principals. Any action instigated by the
agent would be wrong.
25. a — Either representing only the buyer or the seller would constitute a single agency.
Chapter 2: Laws of agency and fiduciary duties 47
26. a — A broker needs to obtain approval from Department of Real Estate (DRE) prior to soliciting
for an advance fee. The other government entities provided in the answer selections have no
jurisdiction over the documents.
27. a — A personal bias suggests a conflict of interest. The other choices would be inappropriate
to the question. Agency, whether dual agency or subagency, would imply a relationship with
the client as opposed to some personal or professional conflict.
28. c — Unlike commingling which is the mixing of client funds, conversion requires the
personal use of client monies.
29. b — The Real Estate Law is found in the Business and Professions Code, which also covers the
ethical practice of licensees.
30. b — A fiduciary duty is owed only to a broker’s client. However, the broker also owes a general
duty to all parties to disclose any material facts about a property, such as title conditions
affecting the property’s use.
31. d — The Real Estate Settlement Procedures Act (RESPA) explicitly protects consumers
from kickbacks and uncompetitive or duplicated fees.
32. a — Implicit suggests something that is implied or understood, though not directly expressed,
eliminating answer selection B. Sanctioned discrimination and C. Overt discrimination.
33. c — Note that the question contains the word ‘attorney’ yet the correct answer demonstrates
any competent person in possession of a power-of-attorney is qualified. Thus, answer choice C
is the best answer.
34. c — Only a drug addict is not a protected class under the Americans with Disabilities Act
(ADA).
35. d — As this is civil action, the answer selection C is inappropriate. Only the full restitution
of the funds paid from the Recovery Fund allows for the reinstatement of the salesperson’s
license.
36. b — Redlining is the refusal to make loans or issue insurance in a neighborhood. Blockbusting
is related to listing efforts. Also known as panic selling, blockbusting occurs when an owner is
warned about demographic changes in the neighborhood. Steering refers to the discriminatory
practice of restricting the rental or ownership of a property to a specific class of people to
perpetuate segregated housing.
37. d — Agency can be created by any of those actions.
38. d — The Real Estate Settlement Procedures Act (RESPA) does not permit referral fees or
kickbacks under any circumstance.
39. d — The mixing of monies is commingling, as demonstrated here. In order for this to be
conversion, the broker would have to be using client funds for personal purposes.
40. b — The chief officer of the Department of Real Estate (DRE) is the Real Estate Commissioner.
The Real Estate Commissioner’s principal responsibility is to enforce all the real estate laws
pertaining to real estate practice, licensing and the Subdivided Lands Act.
41. c — Informing the Department of Real Estate (DRE) of an agent’s illegal activity is an
unconditional requirement. Therefore, none of the other choices can be correct.
42. d — An agent who fails to promptly disclose their dual agency at the moment it arises is subject
to the loss of their brokerage fee, liability for their principals’ money losses and disciplinary
action by the Department of Real Estate (DRE).
43. d — Trust funds come in many forms, including checks, precious metals/stones, stocks/bonds,
collectibles, promissory notes, and any other item or evidence of value.
48 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
44. d — The broker is required to name the employee who is authorized to withdraw trust funds.
The authorized party need not be licensed.
45. c — This is a Civil Rights Act question. The answer may seem obvious if one thinks ‘color
blind’ – the race, creed or color of the prospect does not matter.
46. d — The U.S. Supreme Court has a federal jurisdiction. The action would thus be heard in a
federal court.
47. c — Any time terms must be changed, as with a counteroffer, the principal must make the
decision. It is the agent’s responsibility to give the client all the information and allow them to
make their own decision.
48. b — Answer selections a, c, and d each reference the stated goals of the Equal Credit
Opportunity Act. However, the printing or publishing of an advertisement for the sale or
rental of residential property that indicates a wrongful discriminatory preference is a violation
of the Federal Fair Housing Act (FFHA).
49. d — Altering an existing signed document can never be done without serious legal
consideration. Of the answer selections, D is the only one that addresses a court order.
50. d — As a subagent, approved by the seller, the fiduciary duty would be owed to the seller.
Chapter 3: Property valuation and financial analysis 49
Key Terms
Fundamental real estate vocabulary likely to appear on the state exam with reference to the
quiz questions illustrating its application. See the Real estate glossary on page 331 for the full
definitions.
appraisal (q. 45-48) elements of value (q. 8, 36) narrative report (q. 15, 24)
broker price opinion (BPO) ethics (q. 35) opportunity cost (q. 40)
(q. 49) fair market value (FMV) (q. 54) physical life (q. 56)
capitalization approach (q. 51) financial analysis (q. 30) principles of value (q. 2, 4, 5,
capitalization rate (cap rate) functional obsolescence (q. 21, 19, 20, 31)
(q. 1, 7, 29) 23, 25) reconciliation (q. 18)
comparable sales (comps) gross rent multiplier (GRM) replacement cost (q. 16, 43)
(q. 52) (q. 3, 9, 28) return on investment (ROI)
cost approach (q. 17, 41, 42, 44) highest and best use (q. 32, 33) (q. 57)
depreciation (q. 38, 39) income approach (q. 26, 27) site valuation (q. 13)
economic life (q. 6, 37) influences on value (q. 34) value (q. 11, 12)
economic obsolescence (q. 22, loan-to-value ratio (LTV)
50) (q. 55)
effective age (q. 53) market comparison (q. 10, 14)
50 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Note: This section is designed to give you a broad understanding of the basic principles which
relate to the subject matter of this chapter. However, it is not exhaustive. For further reading on
this concept, see your Real Estate Finance licensing course materials.
There are several other variations on the root principle of value, such as:
• investment value;
• insurance value; and
• value in use.
Value is impacted by numerous factors, known as the elements of value. The elements of value
are:
• Demand, the number of buyers for the property;
• Utility, the property’s possible uses;
• Scarcity, the availability of similar properties; and
• Transferability, the seller’s ability to transfer good title to a buyer clear of all encumbrances
itemized in a title insurance policy.
These elements of value can be easily memorized using the acronym “DUST.”
Further, these elements work together to create the concept of value. When there is a reduced
demand, price goes down. When a specific property has an increased utility, a usage greater than a
similar property, its value increases. Properties which are scarce, such as beach front or golf course
frontage, will find the value increase. Alternatively, if a property cannot be transferred, as is the case
with a clouded title, the value of the property decreases.
There are four major influences on value which are constantly changing:
• Physical, the property’s proximity to commercial amenities, access to transportation, the
availability of freeways, beaches, lakes, hills, etc.;
• Economic, rents in the area, vacancies and the percentage of homeownership;
• Government, property taxes, zoning and building codes; and
• Social.
These influences on value can be easily memorized using the acronym “PEGS.”
Consider the impact of an earthquake or beach erosion. Job creation or increases in income can affect
local real estate prices. Government policy, whether local, state, or federal, can influence value.
Chapter 3: Property valuation and financial analysis 51
Consider what changes in zoning, highway construction, or federal fiscal and monetary policy can
have on local real estate. Finally, there are social changes that impact property values. Consider what
a high crime rate does to value or an improvement in local school scores.
Several economic concepts are used in the appraisal of real estate. These principles are referred to as
principles of appraisal valuation and include:
• The principle of supply and demand: For appraisal purposes, the principle of supply and
demand holds that once the supply of available homes decrease, the value of homes increase
since more people are demanding the available homes. This principle correlates to the density
of the population and its level of income.
• The principle of change: The principle of change holds that property is constantly in a state
of change. The change a property goes through is seen in its life-cycle. The life-cycle of a
property has four stages: development, stability, decline and renewal.
° Development of the property includes the subdivision of lots, improvements constructed
and the start of a neighborhood community.
° During the stability stage of a property, owners become comfortable with their homes
and not much is changed or improved. Maintenance is generally excellent during this
period.
° The decline stage is marked by owners moving out and renting their properties. During
this stage, properties begin to deteriorate, lower social or economic groups move into the
community and larger homes are converted into multiple family use.
° In the renewal phase buyers see an opportunity to increase their equity by purchasing
the rundown homes and bringing them up to current market standards.
• The principle of conformity: The principle of conformity holds that when similarity of
improvements is maintained in a neighborhood, the maximum value of a property can be
realized on a sale. Zoning regulations and conditions, covenants and restrictions (CC&Rs) tend
to protect homeowners by narrowing the uses and excluding nonconforming uses of the
property.
• The principle of regression: The principle of regression holds that the value of the best
property in a neighborhood will be adversely affected by the value of other properties in the
neighborhood.
• The principle of progression: The principle of progression is the opposite of the principle of
regression, holding that a smaller and lesser maintained property in a well-kept neighborhood
will sell for more than if the home were in an area of comparable properties.
• The principle of contribution: The principle of contribution holds that the value of one
component (improvement) is measured in terms of its contribution to the value of the whole
property rather than its cost.
• The principle of substitution: The principle of substitution holds that a buyer will not pay
more for a property if it will cost less to buy a similar property of equal desirability.
The appraisal report contains data collected and analyzed by the appraiser which substantiates the
appraiser’s opinion of the property’s value. The value of an income producing property, given as a
dollar amount, is the present worth to an owner of the future flow of net operating income (NOI)
generated by the property. The appraisal process consists of four steps:
• identifying and defining the appraisal effort to be undertaken by the appraiser;
• data collection, including both general data on the area surrounding the property, and specific
data on the improvements and property lot;
• applying the data; and
• determining the value of the property.
There are three approaches to estimate value in real estate appraisal:
• market comparison (also known as sales comparison), which is most appropriate for single
family residences (SFRs) and the basis of the comparative market analysis that is used by real
estate sales people;
• cost approach, used for special use properties such as churches, schools, and public buildings;
and
• income approach, valid for properties that generate rental income.
While each of the approaches has a unique methodology, they all work on the principle of
substitution. There are several other principles which assist appraisers in developing the estimate
of value.
The market comparison approach is the most commonly used to establish the FMV of real estate.
Applying the market comparison approach, the appraiser looks at the current selling prices of
similar properties to help establish the comparable value of the property appraised. Adjustments
are made for any differences in the similar properties, such as their location, obsolescence, lot size
and condition of the properties.
To produce a more reliable appraisal, it is better to gather data on as many comparable sales, frequently
called “comps,” as are available. Then compare each against the property being appraised for their
similarities.
Appraisers setting value using the cost approach calculate the current construction cost to replace
the improvements. From the replacement cost, appraisers subtract their estimate of the accrued
depreciation of the existing improvements due to obsolescence and deterioration to get the current
replacement value of the improvements.
Added to this is the value of the land as though it was vacant. Thus, the appraised market value
under the cost approach is the result of totaling the value of the lot plus the cost to replace the
improvements minus obsolescence and physical deterioration (depreciation).
• apartments;
• offices;
• industrial buildings;
• commercial units; and
• other income-producing property.
The first step to establish value using the capitalization approach is to determine the property’s
effective gross income. A property’s effective gross income is its gross income minus vacancies
and collection losses.
The second step is to deduct operating expenses from the effective gross income to determine the
property’s net operating income (NOI). Operating expenses that vary, such as utilities and repairs, are
called variable costs. Operating costs that remain constant, such as property taxes, security services
and insurance, are called fixed costs.
The third step is to mathematically divide the property’s NOI by the appropriate cap rate. The cap
rate is comprised of a prudent investor’s expected annual rate of return on monies invested in this
type of property (adjusted for inflation and risk premiums), and a rate of recovery of their invested
monies allocated to the improvements, also called depreciation.
The appraisal report is the documentation of the appraiser’s findings. The types of appraisal reports
include:
• short form – a filled-in form using checks and explanations;
• letter form – a brief written report; and
• narrative report – an extensive written report.
Financial Analysis
To analyze a rental property’s income and expense history under the income approach, the appraiser
begins with an Annual Property Operating Data sheet (APOD). The APOD breaks down both
Exam Jargon
Specialized real estate terminology related to property valuation and financial analysis. See
the Real estate glossary on page 331 for the full definitions.
absorption rate ad valorem tax vacancy rate
54 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
in dollar amounts and as percentages the income and specific operating expenses of the subject
property so as to determine its profitability. From these facts, an appraiser then applies formulas to
arrive at a current property value.
SAMPLE QUESTIONS
1. Which of the following statement regarding capitalization rates is least correct?
a. Lowering the cap rate increases the value of the property.
b. Increasing the cap rate lowers the value of the property.
c. Increasing the risk of loss increases the cap rate.
d. Decreasing the risk of loss increases the cap rate.
2. Loss of value of an expensive home due to the close proximity of lower-priced homes in a
neighborhood is known as:
a. regression. c. functional obsolescence.
b. progression. d. physical depreciation.
3. An apartment building produces a monthly rent of $16,000. A similar property with monthly
rents of $21,000 recently sold for $2,940,000. Using this as the only data, the appraiser would
say that the first apartment building is worth:
a. $2,940,000. c. $2,936,000.
b. $2,240,000. d. $2,475,000.
4. Demand has no effect on value unless there is also:
a. a need for the thing in demand.
b. an adequate supply of the thing in demand.
c. a scarcity of the thing in demand.
d. purchasing power which enables the ability to buy the thing in demand.
5. The vacancy rate of an apartment building under normal competitive conditions is primarily
the result of:
a. employment fluctuations.
b. housing supply and demand in the area.
c. the cost of construction and the cost of money.
d. taxes and insurance.
6. The period for which a property can show a return attributable to the improvements is known
as the property’s:
a. economic life. c. effective age.
b. chronological life. d. depreciation life.
7. A property is valued at $300,000 with a 5% capitalization rate (cap rate). If the prospective buyer
wants an 8% return on their money, the property’s valued would be:
a. $187,500. c. $480,000.
b. $270,000. d. $420,000.
8. All of the following are elements of value, except:
a. cost and age. c. scarcity and transferability.
Chapter 3: Property valuation and financial analysis 55
b. gross monthly rents by selling price. d. sales price by gross monthly rents.
29. To calculate a capitalization rate (cap rate), the appraiser uses which of the following methods:
a. market comparison. c. summation.
b. band of investment. d. Any of the above.
30. An analysis of rental income does not determine the income’s:
a. durability. c. quality.
b. quantity. d. suitability for reinvestment.
31. John is considering an extensive modernization program for an older apartment building he
owns. His decision should give most emphasis to:
a. actual cost. c. potential increase in rents.
b. history of vacancy. d. effect on the net income.
32. The term “highest and best use” can best be defined as:
a. the use that produces the biggest building.
b. the use that produces the highest building.
c. the use that produces the greatest gross income.
d. the use that creates the greatest net return.
33. An appraiser uses a site analysis to determine the:
a. highest and best use of a property.
b. appropriate zoning designation for a property.
c. type of soil under an improved property.
d. comparable values of similar properties.
34. All of the following are forces that influence value, except:
a. Economic. c. Demand.
b. Social. d. Physical.
35. Which of the following is ethical for an appraiser to do?
a. Establish a minimum value prior to accepting the assignment.
b. Use other than accepted methodology in an appraisal assignment.
c. Base the appraisal fee as a percentage of property value.
d. Appraise a property in which the appraiser has an interest, provided they first disclose
their interest in the property.
36. All of the following are essential elements of value, except:
a. anticipation. c. scarcity.
b. demand. d. utility.
37. When comparing the economic life and the physical life of an improvement:
a. economic life is shorter.
b. economic life is the same as the physical life.
c. economic life is longer.
d. physical life is shorter.
38. An appraiser defines depreciation as:
a. economic obsolescence. c. wear and tear of the improvements.
58 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
b. loss in value from any cause. d. recapture that has been realized.
39. To depreciate real estate, it needs to be:
a. free of debt. c. improved.
b. encumbered. d. 1,000 square feet or larger.
40. All of the following are costs NOT associated with homeownership, except:
a. amenity value.
b. loss in value as a result of adverse zoning.
c. loss of interest on owner’s equity.
d. improvement appreciation.
41. Which of the following approaches to valuation yields the highest estimate of value?
a. market comparison. c. substitution.
b. reproduction. d. comparable sales.
42. When appraising a special purpose property, an appraiser uses the:
a. cost approach. c. market data approach.
b. capitalization method. d. land residual approach.
43. To calculate replacement cost, compute the cost to replace:
a. an equally desirable property with the same utility value.
b. the identical structure using the original materials.
c. the identical structure using modern materials.
d. the most economical structure having the same utility value.
44. All of the following are part of the cost approach appraisal method, except:
a. Unit-in-place. c. Quantity survey.
b. Capitalization. d. Index method.
45. Appraisers attempt to estimate the value of real estate. The value is:
a. derived from an income analysis.
b. based solely on the reproduction cost.
c. projected from the original cost.
d. based on an analysis of facts as of a specified date.
46. When conducting an appraisal, all of the following are considered by an appraiser, except:
a. the definition of value. c. the assessed value of a property.
b. the highest and best use of a property. d. the legal description of a property.
47. The first step in the appraisal process is to:
a. set the appraisal fee. c. define the problem.
b. gather data. d. analyze data.
48. An appraisal is made as of a given date to indicate:
a. when the appraiser inspected the property.
b. the loan balance at the time of the appraisal.
c. the market condition at the time the appraisal was completed.
d. the true age of the property.
49. Based on recent comparable sales, an agent’s opinion of a property’s fair market value (FMV) is
referred to as a(n):
a. broker price opinion (BPO). c. appraisal.
Chapter 3: Property valuation and financial analysis 59
ANSWER KEY
1. d — The capitalization rate (cap rate) is the annual rate of return produced by the operations
of an income property. The cap rate is calculated by dividing the net operating income
(NOI) by the price asked or offered for income property. Thus, the value moves in the opposite
direction of the rate, and a higher risk is rewarded by a higher return.
2. a — Regression is the loss of value of nicer homes due to lower-value neighboring properties,
progression is the increase in value of lesser homes due to higher-value neighboring
properties. Both are elements of the principle of conformity.
3. b — When an appraiser is appraising income-producing property, they use the income
approach to determine its value. This is accomplished by dividing the value by the rent,
yielding the gross rent multiplier (GRM). Then, using the rent of the subject property, the
appraiser can determine the value of the subject property.
$2,940,000 ÷ $21,000 = 140
140 x $16,000 = $2,240,000
4. d — Demand requires the ability to pay, called purchasing power.
5. b — The vacancy level and rental income will fluctuate as supply increases or demand grows
or shrinks.
6. a — Economic life is that length of time during which the building remains viable and
generates a return on investment.
7. a — The value will move in the opposite direction as the capitalization rate (cap rate).
$300,000 x .05 = $15,000 (net income)
$15,000 ÷ .08 = $187,500
8. a — The elements of value are Demand, Utility, Scarcity and Transferability (DUST). Therefore,
the correct answer, that which is not included as an element of value, is A.
9. b — According to the income approach, $240,000 (value) / $2,000 (rent) = 120.
10. d — Comparisons need to consider all elements of a property and its neighborhood. Therefore,
answer selection C is not the best answer, and answer select B is not a measurement that is
considered in residential real estate.
11. a — Value is the relationship. Cost is simply the price.
12. c — The price a reasonable, unpressured buyer would agree to for property on the open
market refers to fair market value (FMV).
13. d — Answer choice D is the exception. The other choices might be appropriate reasons for
a separation of site and improvements, whereas the gross rent multiplier (GRM) approach
requires nothing other than calculating the rent multiplied by a multiplier to arrive at a value.
14. c — Whenever possible, an appraiser prefers to compare properties.
15. d — Financing is not part of the appraisal process. All the other answer selections are part of
the narrative report.
16. c — Replacement cost is the cost to build a structure of a similar size and utility using modern
methods and materials. Reproduction cost is creating something as similar as possible to the
original. Both use current costs in the calculation.
17. d — Rehabilitation suggests making necessary repairs without changing any other elements
of the property. Remodeling would change things to current style and preference.
Chapter 3: Property valuation and financial analysis 61
18. d — Note how long this answer selection is. Such an extreme length disproportionate to the
other answer selections indicates this is likely the correct answer. Appraisers never average
numbers between appraisal methods to arrive at a conclusion.
19. b — Substitution applies to income, structural design and use. Nostalgic significance is
unique to a property or individual and is not considered in the principle of substitution.
20. c — Substitution applies.
21. b — Functional obsolescence applies to aspects within the property. External conditions
may represent an economic obsolescence.
22. b — When demand for a property type changes, it can cause a diminished value for existing
buildings. Answer selection B. a zoning change is the best answer since it suggests a need for
an entirely different property use.
23. d — Worn out carpeting is an example of physical deterioration, not an obsolescence.
24. c — Among the written reports, a narrative report is the most detailed and the restricted use
is the least.
25. b — Marketability is the ultimate test. Functional utility relates primarily to the usefulness
of a property based on the needs of the occupant – elements which are integral to the
marketability of a property.
26. b — Only depreciation is a non-cash factor.
27. d — Just as finance is not a consideration in appraisal, the debt service would also not apply.
28. d — An appraiser can determine the value of a property by determining the gross rent multiplier
(GRM). To find this figure, divide the value by the rent.
29. d — Any of these can be applied.
30. d — As applied to rental income, durability = longevity; quantity = amount of rent; quality =
assurance of payment.
31. d — Net income is the key. Increased rents may generate even higher costs.
32. d — Once again, net results are the most relevant. The maximum productivity that generates
the greatest net return is the highest and best use.
33. a — The purpose of a site analysis is to determine the highest and best use of a property.
34. c — The forces are: Physical, Economic, Government, and Social (PEGS). Demand is one of the
elements of value, not an influence on value.
35. d — Disclosure is what makes this answer ethical. Note that none of the other choices are
acceptable.
36. a — Anticipation is a principle. The elements of value are Demand, Utility, Scarcity and
Transferability (DUST). Notice it is not unusual to recognize answers for questions embedded
in other questions and answer selections.
37. a — A building will become economically undesirable long before it is physically unusable.
38. b — A loss in value is the best answer. Economic obsolescence happens off the property. Wear
and tear is dealt with through proper maintenance.
39. c — There must be an improvement to calculate depreciation. Raw land cannot depreciate in
value.
40. c — The owner’s equity invested into a property cannot earn interest as it does when deposited
in the bank.
41. b — Reproduction is a version of the cost approach. Generally, the cost approach produces
the highest estimate of value of all the appraisal methods. The income approach generates the
lowest estimate of value.
62 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
42. a — A special purpose property will not have sufficient comparable sales to generate a valid
analysis nor an income to produce an accurate value. Therefore, the cost approach is the only
appropriate approach to determine value.
43. a — A replacement property is to produce a similar level of utility and be as desirable as the
subject property.
44. b — Capitalization is an income approach method. Unit-in-place is a sub-element of
construction. The index method is for historic cost valuations. Quantity survey is the most
detailed method used by sub-contractors when making bids on projects.
45. d — This is the best answer. Income analysis and reproduction costs may play a part in the
decision but are not exclusively correct. Thus, answer selection D best states how an appraiser
estimates value.
46. c — The assessed value is the county tax assessor’s determination of value for the purposes of
calculating property taxes.
47. c — Like in any similar effort, you must first define what the problem is.
48. c — The best answer selection here is C. An appraisal is an objective opinion of value based on
the market conditions at a specific time.
49. a — The broker’s price opinion (BPO) is based on comparable sales only.
50. c — The fact that buildings are torn down that are not yet physically worn out suggests
economic obsolescence. Market expectations will drive many of these decisions.
51. a — The capitalization method uses an income-producing property’s net operating income
(NOI). The gross rent multiplier (GRM) method uses the gross rent generated by an income-
producing property.
52. c — The cost approach is the best answer selection. As the property does not generate income,
neither answer selection A or B are applicable as they are both based on the income approach.
Further, answer selection D may be eliminated as there is insufficient sales data of comparable
properties available to make a comparison.
53. a — Effective age refers to the 10 year old condition of the property. Actual age is 20 years.
54. d — Eminent domain has no specific relevance to zoning. The consideration that must be paid
to the owner is the fair market value (FMV) of the property which is determined as the price a
willing buyer would pay to a willing seller when the property has had adequate exposure on
the market and neither party is under any duress.
55. b — The loan-to-value ratio (LTV) reflects the mortgage balance as a percentage of the
mortgaged property’s fair market value (FMV). Lenders will loan against the sales price or the
value of the property as determined by an appraisal, whichever is lower.
56. a — A building will become economically undesirable long before it is physically unusable.
Note that economic life represents the length of time a building produces a reasonable return.
Alternatively, physical life is based on how long the building would remain physically
standing. Thus, a property’s economic life is the shorter of the two.
57. c — While the return on investment is profit, the return of investment is the recuperation of
the investment through depreciation.
58. c — The cost approach requires the appraiser to adjust the house and garage costs, known as
the “cost new” of constructed improvements, by a depreciation factor. Thus: $300,000 (house) +
$75,000 (garage) = $375,000 x 0.2 (20% depreciation) = $75,000. Then subtract the depreciation
amount from the cost new. $375,000 (cost new) - $75,000 (accrued depreciation) = $300,000
(depreciated cost new). Finally, add the various amounts: $150,000 (site) + $300,000 (depreciated
construction costs) + $75,000 (site improvements) = $525,000.
Chapter 4: Financing 63
Chapter 4: Financing
Key Concepts
Critical real estate concepts equaling approximately 9% of the state licensing exam.
• General concepts • Financing/credit laws
• Sources of financing • Loan brokerage
• Mortgages/deeds of trust/notes • Types of loan originators
• Types of loans • Default and foreclosure
• Government programs
Key Terms
Fundamental real estate vocabulary likely to appear on the state exam with reference to the
quiz questions illustrating its application. See the Real estate glossary on page 331 for the full
definitions.
acceleration (q. 46) debt-to-income (DTI) ratio (q. home equity line of credit
adjustable rate mortgage 51) (HELOC) (q. 52)
(ARM) (q. 39) deed-in-lieu of foreclosure hypothecate (q. 3)
amortization (q. 8) (q.15) impound account (q. 24)
annual percentage rate deficiency judgment (q. 16) inflation (q. 25)
(APR) (q. 37) deflation (q. 13) interest rate (q. 26, 27)
assignment (q. 7) due-on clause (q. 46) loan brokerage (q. 28)
assumption (q. 35) Federal Reserve (q. 14) mortgage insurance premium
balloon payment (q. 47) Federal National Mortgage (MIP) (q. 53)
beneficiary (q. 6) Association (FNMA) (q. 23) negative amortization (q. 54)
beneficiary statement (q. 10) foreclosure (q. 5, 19, 30) notice of default (NOD) (q. 7)
blanket mortgage (q. 48) government loan programs open-ended mortgage (q. 43)
CalHFA (q. 40) (q. 22) points (q. 9)
CalVET (q. 11) graduated payment mortgage prepayment penalty (q. 55)
construction loan (q. 49) (q. 41) private mortgage insurance
conventional mortgage (q. 50) hard money loan (q. 42) (PMI) (q. 56)
64 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Note: This section is designed to give you a broad understanding of the basic principles which
relate to the subject matter of this chapter. However, it is not exhaustive. For further reading on
this concept, see your Real Estate Finance licensing course materials.
The Federal Reserve (the Fed) is the central bank in control of regulating the U.S. financial and
monetary system. Thus, the Fed plays an integral role in the overall economic and financial health
of the nation. The Fed’s mandate is to keep the economy stable. It fulfills this task by maintaining
sufficient dollars in circulation as our nation’s medium of exchange, and in doing so, maintaining
both job and price stability.
Purchasing power refers to a homebuyer’s ability to purchase property funded by mortgage money
based on 31% of their gross income for mortgage payments and current interest rates. A buyer’s debt-
to-income ratio (DTI) has two components: the front-end DTI ratio is the percentage of a buyer’s
monthly pre-tax gross income spent on housing costs; the back-end DTI ratio is the percentage of
the buyer’s income spent monthly on all debt payments. Together, lenders use a borrower’s DTI to
determine whether they qualify for a loan.
Sources of financing
Most real estate sales hinge on financing some portion of the purchase price. In these purchase-
assist mortgage financing arrangements, a lender generally funds the buyer’s purchase price.
In exchange for the mortgage, the buyer promises to pay a sum of money to the lender either in:
Chapter 4: Financing 65
• installments; or
• a single payment at a future time.
Alternatively, seller financing, also known as an installment sale, credit sale or carryback
financing, occurs when a seller carries back a note and trust deed executed by the buyer to evidence
a debt owed for purchase of the seller’s property. The amount of the debt is the remainder of the price
due to the seller after deducting:
• the down payment; and
• the amount of any existing or new mortgage used by the buyer to pay part of the price.
A senior mortgage, also known as a senior lien or first mortgage, is the first loan against a
property and has priority.
A junior mortgage, also known as a junior lien or second mortgage, is the second or subsequent
loan on a property in a lesser, subordinate position. For example, a home equity line of credit (HELOC)
is generally in a second position.
The portfolio yield, also known as the mortgage yield, is any earnings from fees or interest on a
mortgage realized by a mortgage holder, such as lender or carryback seller.
An impound account, also called an escrow account, is a money reserve of a property owner’s
funds received and held by a mortgage holder to pay the owner’s annual obligations owed for
property taxes, hazard insurance premiums, assessment liens and improvement bonds.
Mortgages/deeds of trust/notes
The promise to pay the debt is set out in a written document called a promissory note. A promissory
note is a document given as evidence of a debt owed by one person (the borrower/debtor/payor) to
another (the lender/carryback seller/payee).
If the note is secured by real estate, the security device used is a trust deed, commonly called a
mortgage. When secured, the debt evidenced by the note becomes a voluntary lien on real estate
described in the trust deed that references the note.
Promissory notes are categorized by the method for repayment of the debt as either:
• installment notes; or
• straight notes.
66 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
An installment note calls for periodic payments of principal and interest (or interest only) until the
principal is paid in full by amortization or a balloon payment.
Amortization refers to the constant periodic payment of principal until the principal has been fully
repaid. A balloon payment is any final payment on a note which is greater than twice the amount
of any one of the six regularly scheduled payments immediately preceding the date of the balloon
payment.
To secure payment of the debt by a parcel of real estate, the security device used is a trust deed. The
trust deed is always the preferential method used to impose a lien on real estate.
The lien gives the lender or carryback seller the right to foreclose on the real estate if the borrower
defaults.
The trust deed identifies three parties, each of whom has distinctly separate roles in the mortgage
transaction:
• the borrower/owner (trustor) who voluntarily encumbers their property with the trust deed
lien;
• the middleman (trustee) who holds the power of sale to auction the property; and
• the lender or carryback seller (beneficiary) who benefits from the trust deed lien encumbering
the property.
The trustor who signs and delivers a trust deed to a lender or carryback seller is the owner of the real
estate interest encumbered. Delivery is accomplished by recording the trust deed with the county
recorder, which perfects its priority on title.
Types of loans
An installment note produces a schedule of constant periodic payments which amortize the
principal. In doing so, the constant amount of scheduled payments contains diametrically varying
amounts of principal and interest from payment to payment. With each payment, the amount of
principal reduction increases and the amount of interest paid decreases. The installment note is the
standard type of loan for consumer mortgage financing.
A straight note calls for the entire amount of its principal together with accrued interest to be paid
in a single lump sum when the principal is due. Unlike in the installment note variation, a straight
note does not include periodic payments of principal.
A note with a fixed interest rate, commonly called a fixed rate mortgage (FRM), provides the classic
method for calculating interest that accrues on principal. With an FRM, the interest rate remains
fixed for the life of the mortgage.
However, variations on the interest rate and repayment schedules contained in the installment and
straight notes exist:
• adjustable rate mortgage (ARM);
• graduated payment mortgage (GPM);
• all-inclusive trust deed (AITD) note; and
• shared appreciation mortgage (SAM).
Chapter 4: Financing 67
The ARM, as opposed to an FRM, calls for periodic adjustments to the interest rate. In turn, the amount
of the scheduled payments fluctuates with each interest rate adjustment based on movement in an
agreed-to index.
With a GPM, payments increase periodically by predetermined amounts until the payment fully
amortizes the principal over the remaining life of the mortgage without a further increase in
payments, the interest rate on the note being fixed.
The AITD variation of a note is common in carryback transactions. The AITD note, also known as a
wraparound or overriding note, typically calls for the buyer to pay the carryback seller constant
monthly installments of principal and interest. The carryback seller then pays the installments as
they become due on the underlying (senior) mortgage, generally out of the payments received on
the AITD note.
The SAM repayment schedule variation calls for the buyer to periodically pay interim interest at a
fixed rate, then when the principal balance is due, to further pay the mortgage holder additional
interest calculated as a fraction of the property’s increased net value since origination. In return,
the carryback seller receives part of the property’s appreciated value as additional interest, called
contingent interest, when the property is sold or the carryback SAM is due.
When a debt secured by a trust deed lien on real estate has been fully paid, the lien is removed from
title in a process called reconveyance.
Private mortgage insurance (PMI) is default mortgage insurance coverage provided to a mortgage
holder by private insurers on conventional mortgages with loan-to-value (LTV) ratios higher
than 80%. LTV is a ratio stating the outstanding mortgage balance as a percentage of the mortgaged
property’s fair market value (FMV). Thus, PMI indemnifies a mortgage holder against losses on their
investment in a mortgage when a borrower defaults.
Generally, an acceptable LTV for conventional mortgages is 80% of the property’s value. An LTV of
80% requires the buyer to make a minimum 20% down payment. A greater LTV compels the lender
to require the buyer to obtain PMI.
Promissory notes typically contain a late charge provision. The late charge provision calls for an
additional charge if payment is not received by the mortgage holder when due or within a grace
period after which the payment is delinquent. Also, the minimum grace period before a mortgage
encumbering an owner-occupied, one-to-four unit residential property is delinquent is ten days after
the due date without receipt of the payment.
Related to the note and trust deed is the land sales contract, also known as a conditional sales
contract, installment sales contract or real property sales contract. Under a land sales
contract, a buyer and seller enter into a contract for the sale of property. The buyer takes possession
of the property and makes payments according to the terms of the contract. Title does not formally
pass to the buyer by grant deed until the buyer pays the seller in full.
On the sale of a parcel of real estate, existing financing encumbering the property sometimes remains
of record and is taken over by a buyer. The buyer generally takes title to the property under one of
two procedures:
• a formal assumption between the mortgage holder and the buyer; or
• a subject-to assumption between the seller and the buyer.
68 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
A formal assumption is a buyer’s promise to perform all the terms of the mortgage, given to the
mortgage holder on the buyer’s takeover of an existing mortgage, typically involving a modification
of the interest rate and payments and an assessment of points and fees.
A subject-to assumption agreement is a promise given by the buyer to the seller to perform all the
terms of a mortgage taken over by the buyer on the property purchased.
Government programs
A variety of state and federal loan programs exist, offering down payment assistance for low- to
moderate-income buyers and first-time buyers, mortgage refinance or modification programs to
distressed owners, and special programs for veterans.
Federal programs
U.S. Department of Veterans Affairs (VA) mortgage guarantee: The VA mortgage guarantee
program assists qualified veterans or their surviving spouses to buy a home with zero down
payment.
Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage
Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie
Mae): Fannie Mae, Freddie Mac and Ginnie Mae are government-sponsored enterprises (GSEs)
designed to help facilitate home purchases for low- to moderate-income buyers. Fannie Mae and
Freddie Mac do not provide home mortgages directly. Instead, they purchase and package pools
of qualifying mortgages originated by mortgage bankers, known as conforming mortgages, as
mortgage-backed bonds (MBBs). They then sell the MBBs to Wall Street Bankers on the secondary
mortgage market.
State programs
Financing/credit laws
The Real Estate Settlement Procedures Act (RESPA) is a federal law promoting lender
transparency in their mortgage origination process to protect consumers from kickbacks and
Chapter 4: Financing 69
uncompetitive or duplicated fees. RESPA mandates lenders and mortgage holders disclose all
mortgage related charges on mortgages used to purchase, refinance or improve one-to-four unit
residential properties.
Similarly, the Closing Disclosure replaces the HUD-1 Settlement Statement and the final Reg Z.
disclosure. The Closing Disclosure contains the actual terms and costs incurred in the transaction,
which is then compared by the borrower against the Loan Estimate form. If the amounts paid by
the borrower at closing exceed the amounts disclosed in the Loan Estimate by more than the set
tolerances, the excess is to be refunded to the borrower within 60 days of closing.
The Equal Credit Opportunity Act is a federal law enacted in 1974 prohibiting discrimination
in lending based on race, color, religion, national origin, sex, marital status or age (provided an
individual is of legal age). The anti-discrimination rules apply to institutional lenders, loan brokers,
and others who make or arrange loans.
California’s usury law limits the interest rate on non-exempt real estate loans to the greater of:
• 10%; or
• the discount rate charged by the Federal Reserve Bank of San Francisco, plus 5%.
Usury laws apply only to a loan of money or the forbearance of payment on a money loan. Thus,
seller carryback notes are not covered by usury law.
Loan brokerage
The 2008 Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) created a
uniform national licensing scheme for mortgage loan originators (MLOs) and the Nationwide
Mortgage Licensing System and Registry (NMLS) for registering MLOs.
70 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
To implement the SAFE Act, the Department of Real Estate (DRE) and the NMLS work together.
The DRE sets the minimum standards for DRE licensees who arrange consumer mortgages for a fee
as MLO endorsees.
The NMLS:
• processes MLO applications;
• assigns unique NMLS ID numbers; and
• administers the national MLO registry.
DRE licensees are required to obtain an MLO endorsement and unique NMLS ID when they:
• take an application for or negotiate a residential mortgage loan, an activity called arranging;
and
• they receive fees for arranging the residential mortgage loan.
Warehoused mortgages are sold on the secondary mortgage market to investment pools, such as
Fannie Mae, Freddie Mac and Ginnie Mae.
The business of servicing mortgages is also bought and sold. This causes the mortgage to appear to be
changing hands. Typically, the originating lender continues to service the mortgage when they sell
the mortgage to an investor.
The public sale held by a court-appointed receiver or sheriff is conducted as an auction. A certificate
of sale is issued to the successful bidder on the completion of a judicial foreclosure sale.
Although the bidder purchased the property at the public auction, they will not become the owner
of the property or be able to take possession of it until the applicable redemption period expires.
On a judicial foreclosure, the property owner has three months after the judicial sale to redeem the
property by paying off the entire debt and costs.
However, if the owner is liable on a recourse debt for a deficiency in the property’s value, the owner
has up to one year after the judicial sale to redeem the property.
Further, a junior trust deed holder may reinstate the note by paying the trust deed delinquencies
and foreclosure costs, bringing the trust deed note current. The junior lienholder has until the time
the property is sold at the judicial foreclosure sale to redeem the property.
Once a property is sold at a judicial foreclosure sale, any liens subordinate to the foreclosing mortgage
holder’s trust deed are wiped out and eliminated from the title.
The judicial foreclosure process can last from eight months to multiple years before it is completed.
Alternatively, when a mortgage holder nonjudicially forecloses by a trustee’s sale, the property is
sold as authorized by the trust deed provisions at a public auction, called a trustee’s sale.
Unlike a judicial foreclosure sale, the completion of a trustee’s sale bars the foreclosing mortgage
holder from obtaining a money judgment for any unpaid balance remaining after the foreclosure
sale due to insufficient value in the secured property.
After an NOD is recorded and prior to five business days before the trustee’s sale, the owner is able to
terminate the foreclosure proceedings by paying:
• the delinquent amounts due on the mortgage as described in the NOD and foreclosure charges,
called reinstatement; or
• the entire amount due on the mortgage, plus foreclosure charges, called redemption.
On average, it takes approximately four months to nonjudicially foreclose on a property, though this
can be longer when mortgage holders are inundated with a high volume of foreclosures to process.
Alternatively, when a property owner with negative equity defaults, a mortgage holder may first
attempt to arrange for a deed-in-lieu of foreclosure before initiating a trustee’s foreclosure. A deed-
in-lieu is a grant deed conveying the mortgaged real estate to a mortgage holder which is accepted
from the property owner in exchange for cancelling the mortgage debt to avoid foreclosure.
72 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Exam Jargon
Specialized real estate terminology related to financing. See the Real estate glossary on page
331 for the full definitions.
cramdown nonrecourse mortgage teaser rate
implicit rent REO property tranches
intermediation recourse
negative equity shadow inventory
SAMPLE QUESTIONS
1. A second trust deed can be distinguished from a first trust deed by:
a. the heading of the instrument. c. the time and date of recording.
b. the information contained in the note. d. agreement of the principals.
2. All of the following are NOT true regarding promissory notes, except:
a. They are used as security for trust deeds.
b. Discounting a note indicates it is being sold at more than the face value, or the amount
still owing on the principal.
c. They are always used when real state is sold.
d. They are the evidence of the debt.
3. Hypothecate means:
a. to give a thing as security without giving possession.
b. to sell.
c. to substitute.
d. to alienate.
4. Who generally benefit the most by a subordination clause in a trust deed?
a. The beneficiary. c. The trustee.
b. The trustor. d. The county tax assessor.
5. Total foreclosure time under a trustee’s sale on a trust deed is minimally:
a. one year. c. three months.
b. fifteen months. d. four months.
6. The beneficiary of a trust deed is most likely a:
a. buyer. c. trustee.
b. bank. d. borrower.
7. A clause in a trust deed calling for an assignment of rents most benefits the:
a. trustee. c. purchaser.
b. trustor. d. beneficiary.
8. On each payment of an amortized loan:
a. the same amount applies to principal each month.
b. there will be a balloon payment.
c. the amount applying to the principal increases with each payment.
d. the amount applying to the interest increases with each payment.
Chapter 4: Financing 73
18. An owner’s right to bring current any monetary or curable default stated in the notice of default
(NOD) prior to five business days before the date of the sale is called:
a. refurbishment. c. reinstatement.
b. rejuvenation. d. redemption.
19. Bruce sold his home for $215,000 to Maria and carried back a $150,000 note with interest at
6% per annum. The note was secured by a first trust deed. The home had a fair market value
(FMV) of $200,000. Later, Bruce sold the trust deed and note at a discounted price of $135,000 to
Syndi. On the back of the note, Bruce wrote, “I hereby assign the within note to Syndi without
recourse.” If Maria defaults before any principal payments are made, Syndi’s best legal remedy
is to:
a. foreclose to recover the $135,000 investment.
b. do nothing since she has no recourse as an investor who purchased an existing loan
and has no right to foreclose.
c. sue her assignor.
d. foreclose to enforce payment of the $150,000.
20. The power to sell a property in the event of a default under the terms of the trust deed is given
by:
a. trustee to the trustor. c. buyer to the seller.
b. buyer to the beneficiary. d. trustor to the trustee.
21. All of the following entities buy loans in the secondary mortgage market, except:
a. Freddie Mac. c. Fannie Mae.
b. Ginnie Mae. d. Federal Housing Administration (FHA).
22. Which of the following loans would be most likely to qualify for Federal Housing
Administration (FHA) insurance but not for a Veterans Administration (VA) loan guarantee?
a. A loan to fund the purchase of agricultural land.
b. A loan to fund the purchase of one-to-four units of residential rental property.
c. A loan to fund the purchase of a motel.
d. A loan to fund the purchase of an existing business.
23. The primary purpose behind the creation of the Federal National Mortgage Association
(FNMA) was:
a. to increase the money available to housing.
b. to provide funds to large home builders in urbanized areas.
c. to lend money on FHA Title II loans when banks, savings and loan associations, or
private lenders are unwilling to do so.
d. to supervise public lending agency associations.
24. In real estate loans, the term “impounds” most nearly means:
a. attachments. c. court action.
b. reserves. d. short rate.
25. Inflation can be seen in the:
a. increase in the cost of living. c. existence of tight monetary policy.
b. reduction of interest rates. d. tightening of loan policies.
Chapter 4: Financing 75
26. Marta borrowed $25,000 on a straight note. In eight months, she paid $1,500. What was the
interest rate:
a. 8%. c. 10%.
b. 9%. d. Cannot be calculated.
27. All of the following directly affect the level and movement of mortgage interest rates, except:
a. demand for funds. c. inflation rate.
b. supply of funds. d. unemployment rate.
28. The term warehousing in reference to mortgage financing describes:
a. industrial property loans.
b. jumbo residential loans.
c. a mortgage broker who arranges loans for an individual borrower.
d. a mortgage broker who packages loans prior to their sale on the secondary market.
29. The release clause in a trust deed is there to release:
a.the escrow company of liability.
b.a borrower from certain obligations.
c.the lender from future obligations.
d.some properties upon partial payment, when more than one property is used as security
for the debt.
30. A homebuyer may rescind a purchase contract on a property for:
a. 1 day. c. 1 week.
b. 3 days. d. 10 days.
31. One of the primary purposes of the Real Estate Settlement Procedures Act (RESPA) is to:
a. set the settlement costs in all real estate transactions.
b. standardize the prices of settlement costs on one-to-four unit residential properties.
c. provide consumers with enough information to enable them to effectively shop for
settlement services.
d. standardize settlement services throughout the United States.
32. Most junior loans are originated by:
a. private sources. c. savings and loans associations.
b. commercial banks. d. insurance companies.
33. The phrase “the secondary mortgage market” refers to:
a. government bonds.
b. junior trust deeds.
c. the kind of loans made by insurance companies or pension funds.
d. a resale marketplace for existing trust deed loans.
34. A note payable for “interest only” is called a(n):
a. straight note. c. nonnegotiable note.
b. amortized loan. d. hard money loan.
76 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
35. When the buyer takes title to the property subject to the existing loan, “subject to” most nearly
means:
a. both the buyer and seller will then be equally liable for the loan.
b. the seller has no liability for the loan.
c. only the buyer will be liable for the loan.
d. the buyer will not be personally liable for the loan.
36. A(n) provision in a trust deed allows future loans on the property to have
priority.
a. agency clause c. subordination clause
b. release clause d. mediation clause
37. Under the Federal Truth-in-Lending Act (TILA), the cost of credit is expressed as:
a. a maximum percentage rate. c. a minimum percentage rate.
b. an annual percentage rate. d. the annual interest rate.
38. Regulation Z (Reg Z) of the Federal Truth-in-Lending Act (TILA) gives the borrower a 3 day
right of rescission when the loan is:
a. a purchase money loan secured by a deed of trust on commercial property.
b. a loan to refinance the borrower’s personal residence.
c. a Federal Housing Administration (FHA) or Veterans Administration (VA) loan to
purchase a single family, owner occupied residence.
d. a loan to purchase a commercial building.
39. The real estate loan that allows interest rates to increase or decrease depending on money
market conditions is called a(n):
a. interim loan. c. adjustable interest rate loan.
b. secured loan. d. fluctuating market condition loan.
40. The loan program that requires payment of mortgage insurance premiums (MIPs) and will
make loan payments for up to six months if the borrower becomes involuntarily unemployed
is called:
a. Veterans Administration (VA).
b. Federal Housing Administration (FHA).
c. California Department of Veterans Affairs (CalVET).
d. California Housing Finance Agency (CalHFA).
41. A graduated payment adjustable mortgage (GPAM) provides for:
a. deferment of certain payments on the principal during the early years of the loan.
b. the loan to be renegotiated at a later date by the mutual agreement of the borrower and
lender.
c. the loan to have several short-term loans at various interest rates embedded within it.
d. the carryback seller to receive part of the property’s appreciated value as additional
interest.
42. All of the following are NOT true concerning a hard money loan, except:
a. It has a lower interest rate. c. It is seller financing.
b. It is a purchase money second d. It is a cash loan.
trust deed.
Chapter 4: Financing 77
43. A mortgage which provides for securing the amount of the initial loan together with any sums
later loaned to the mortgagor is known as a(n):
a. installment loan. c. wraparound mortgage.
b. open-ended mortgage. d. blanket mortgage.
44. The charging by a private lender of more than the maximum amount of interest allowed by
law is known as:
a. unearned increment. c. usury.
b. leverage. d. onerous.
45. A buyer is most likely able to borrow 100% of the purchase price with which of the following
types of financing?
a. Federal Housing Authority (FHA). c. Fannie Mae (FNMA).
b. Veterans Administration (VA). d. Conventional.
46. All of the following are circumstances under which a lender will generally enforce the due-on
sale clause in a promissory note, except:
a. when a new loan is made at a lower rate of interest than the existing loan.
b. when high unemployment rates cause a glut of residences to be on the market.
c. when deflation occurs and there are more houses for sale than there are buyers.
d. All of the above.
47. Any final payment on a note which is greater than twice the amount of any one of the six
regularly scheduled preceding payments is known as a:
a. private mortgage insurance c. due-on clause.
(PMI) premium.
b. balloon payment. d. prepayment penalty.
48. A blanket encumbrance created for a real estate loan would most likely benefit the:
a. trustor. c. beneficiary.
b. trustee. d. borrower.
49. The maturity date of a construction loan begins from:
a. the date of the note. c. the date of the first disbursement.
b. the date construction begins. d. the date escrow is formally closed.
50. Compared to a loan insured by a government entity, a conventional loan has a:
a. lower interest rate. c. greater degree of security.
b. lower loan-to-value (LTV) ratio. d. longer amortization period.
51. Lenders use a debt-to-income ratio (DTI) to determine:
a. the degree of risk they are willing to take.
b. whether a borrower qualifies for a loan.
c. the appraised value of a property.
d. the title insurance fees to be charged.
52. A loan broker arranged a home equity loan for $9,600. The broker must provide the borrower
with which of the following?
a. Mortgage loan disclosure statement. c. Loan balance statement.
b. Regulation Z disclosure statement. d. Broker closing statement.
78 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
53. The mortgage insurance premium (MIP) paid on a Federal Housing Administration (FHA)
loan protects:
a. the borrower. c. Sallie Mae.
b. the FHA. d. the lender.
54. A negative amortizing loan allows unpaid interest to be added to the principle balance. This is
an example of:
a. compounding interest. c. simple interest.
b. double interest. d. flexible interest.
55. A prepayment penalty is the opposite of a(n):
a. alienation clause. c. choice-of-law provision.
b. “or more” clause. d. mediation provision.
56. In real estate financing, the acronym “PMI” means:
a. point margin indicator. c. Professional Maintenance Institute.
b. private mortgage insurance. d. Property Managers Incorporated.
57. A “seasoned” loan is a(n):
a. short-term due date for a balloon payment.
b. quality loan.
c. loan made at the beginning of spring.
d. loan in which there is a record of consistent and timely payments made on the loan.
58. A shared appreciation mortgage (SAM) is most beneficial when:
a. prices of homes are steadily appreciating.
b. a reverse mortgage is considered.
c. a rollover or takeout loan is needed.
d. prices of homes are declining.
59. A lender most likely to make a loan to a borrower with a FICO score of 500 would be:
a. the Federal Housing Administration c. an institutional bank.
(FHA).
b. a subprime lender. d. savings and loan association.
60. The sale of property in which the amount of the net proceeds is less than the principal balance
owed but is accepted by the lender in full satisfaction of the loan is called a(n):
a. reverse mortgage. c. deed-in-lieu of foreclosure.
b. short sale. d. piggyback sale.
61. An all-inclusive trust deed (AITD), also known as a(n) , reduces the seller’s risk of
loss and defers more profit taxes than a regular second trust deed note.
a. mortgage commitment c. land sales contract
b. wraparound mortgage d. equity purchase agreement
62. The buyer in a sale leaseback transaction would be least concerned with the:
a. original cost to construct the building. c. condition of the improvements.
b. general credit of the lessee. d. location of the property.
Chapter 4: Financing 79
ANSWER KEY
1. c — The priority of trust deeds is determined by the time and date of recording.
2. d — Promissory notes are the evidence of debt. Trust deeds are security for debt. Though
promissory notes and trust deeds are frequently used as the loan instruments, there are
alternatives, such as a land sales contract. Note when the word “always” appears in an answer
choice, one exception defeats its accuracy.
3. a — To hypothecate is to offer property (real or personal) as security for a loan without giving
up possession.
4. b — The borrower (trustor) benefits the most from a subordination clause since this makes it
easier to obtain an additional loan on their property. For example, the buyer of vacant land can
obtain a construction loan more easily if the loan against the land will be subordinated to the
construction loan.
5. d — A trustee’s sale includes a three month redemption period followed by three weeks of
advertising the sale for a total just short of four months if the sale is processed without any
delay. In practice, it is generally longer.
6. b — The beneficiary is the lender. Therefore, the only answer selection that applies is the
bank.
7. d — An assignment of rents clause allows the lender to collect the rents on an income-producing
property when the borrower defaults on the underlying loan.
8. c — With an amortized loan, whether fully or only partially amortized, the balance of the
loan is reduced with each payment. Therefore, the interest portion of the payment decreases
and the principal portion increases with each payment made.
9. b — While all answer selections relate to one another, points and prepaid interest are
synonymous, making this answer selection the best match.
10. c — A lender (beneficiary) delivers a beneficiary statement to escrow as a statement of
required funds to release the existing debt.
11. b — CalVET loans are land contract purchases with the state functioning as the vendor.
12. d — A trustee records a reconveyence deed to release a trust deed.
13. a — Deflation is the opposite of inflation where money becomes worth less.
14. d — The tightening of money allows less money to be available for lending, resulting in a
decrease of loan activity.
15. d — When the holder of the first trust deed accepts a deed-in-lieu, they become responsible
for all liens junior to their position.
16. d — A deficiency judgment cannot be obtained through any of the provided answer
selections. For example, a deficiency judgment cannot be obtained if the security is a purchase
money trust deed (answer selection A). A mortgage holder must use the judicial foreclosure
option rather than a trustee’s sale to receive a deficiency judgment (answer selection B). If the
fair market value (FMV) of the property exceeds the amount due on the trust deed, no deficiency
would exist (answer selection C).
17. c — The borrower (mortgagor) has possession during the redemption period.
18. c — When full payment of arrears and costs have been made, the loan has been reinstated,
bringing the loan current and placing the borrower in good standing.
80 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
19. d — The demand would be on Maria for the full amount of the monies owed regardless of the
discounted price paid for the note.
20. d — It is the borrower (trustor) who gives the authority to sell to the trustee.
21. d — The Federal Housing Administration (FHA) is neither the lender nor purchaser of
loans on the secondary mortgage market. The FHA acts as an insurer of the loan which is
originated by a lender or mortgage company.
22. b — While neither the Federal Housing Administration (FHA) or Veterans Administration
(VA) will guarantee properties intended for business (motel or agriculture included), FHA will
do small residential rentals (one-to-four units).
23. a — The Federal National Mortgage Association (FNMA) was created to repurchase
qualifying loans, thus placing cash in the lenders’ hands to facilitate a continuing source of
monies to loan.
24. b — When a lender requires impounds, they are demanding that monthly payments be made
to establish a reserve fund to pay future property tax and insurance expenses.
25. a — Inflation is the reverse of deflation. Therefore, money becomes worth less and products
become more expensive.
26. b — This question calls for an interest rate calculation using the following formula: Interest =
Principal x Rate x Time (I = PRT).
$1,500 = $25,000 x R x 8/12
1,500 = 25,000 x R x 0.667
1,500 = 16,667 x R
1,500 / 16,667 = (16,667 x R) / 16,667
0.09 = R or 9%
27. d — Supply and demand affects the return a lender can charge on a loan. Inflation is a risk
factor that a lender adds to the yield required to fund. Unemployment indirectly influences
the level and movement of mortgage interest rates through actions of the Federal Reserve (the
Fed).
28. d — Warehousing in finance is similar to a retailer concept. Mortgage brokers bundle loans
for sale on the secondary market.
29. d — When several properties are securing one loan, known as a blanket mortgage, a release
clause allows individual properties to be withdrawn from the obligation.
30. b — The statutory right to rescind certain contracts runs for a three day period starting from the
date the contract is entered into.
31. c — While standardizing costs may seem likely a reasonable goal, the Real Estate Settlement
Procedures Act (RESPA) is primarily intended to insure that consumers are not being charged
hidden fees and have the information they need to make an educated decision between
competing lenders.
32. a — Junior loans typically are originated by private sources – most often the seller of the
property who extends carryback financing to the buyer.
33. d — Don’t confuse “second trust deed” with “secondary mortgage market.” The secondary
mortgage market is where lenders resell bundled loans.
34. a — Interest only loans are those that are not amortized as payments are not applied to the
underlying principal.
Chapter 4: Financing 81
35. d — As opposed to assuming a loan, when the buyer takes title “subject to” an existing loan, the
seller remains liable for the debt.
36. c — To subordinate a loan indicates the loan is to take a secondary position. In finance this
implies that future loans will have a priority over the subordinated loan.
37. b — Financing costs are stated as an annual percentage rate (APR).
38. b — Regulation Z (Reg Z) of the Federal Truth-in-Lending Act (TILA) applies to one-
to-four unit residential properties, therefore answer selections A and D do not apply. Further
government loans have their own restrictions.
39. c — An adjustable interest rate loan, also known as an adjustable rate mortgage (ARM),
allows for interest rate fluctuations based on changes in an agreed to index.
40. d — Only the California Housing Finance Agency (CalHFA) offers a loan program on
these terms.
41. a — The unique quality to a graduated payment adjustable mortgage (GPAM) is the fact
that payments are increased periodically over the life of the loan, making it lower in the early
years.
42. d — Hard money loans are made by a private lender to generate cash for a property owner.
43. b — An open-ended loan is one that allows for future advanced monies as part of the original
commitment, such as a home equity line of credit (HELOC).
44. c — Usury is the term that describes an interest rate that exceeds the legal limit.
45. b — The Federal National Mortgage Association (FNMA) is not a primary lender and neither
conventional nor Federal Housing Administration (FHA) lenders have programs that generally
allow the borrower to borrow 100% of the purchase price.
46. d — All these conditions make it less likely a lender would want to accelerate the loan by
enforcing the due-on clause.
47. b — Any loan that is not fully amortized will require a final/balloon payment of the balance
owing.
48. c — A blanket encumbrance gives the lender (the beneficiary) added security for the loan.
49. a — The date on the note establishes the beginning of the maturity process.
50. b — Conventional loan programs generally require a lower loan-to-value ratio.
51. b — The debt-to-income ratio (DTI) sets the amount of debt a borrower can carry in relation
to their income. A higher DTI represents a higher degree of risk of borrower default.
52. a — A lender who originates a home equity line of credit (HELOC) is required to deliver a
copy of the mortgage loan disclosure statement to the borrower.
53. d — The mortgage insurance required for Federal Housing Administration (FHA)-insured
loans are for the protection of the lender.
54. a — Compounding interest causes an additional cost of the interest expense on the interest
not paid.
55. b — A prepayment penalty imposes a charge on the borrower for paying off the debt early.
With an ‘or more’ clause, the borrower is allowed to prepay the loan at any time with no
penalty.
56. b — PMI is the acronym for private mortgage insurance paid to a private mortgage insurer.
Alternatively, a mortgage insurance premium (MIP) is paid on a government-insured
loan.
82 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
57. d — A seasoned loan has a consistent history of loan repayment. An investor may feel more
inclined to purchase a seasoned loan as they are confident the borrower will continue to make
the required payments.
58. a — Steady home price appreciation makes the shared appreciation mortgage (SAM) in
which the lender receives a share in the future increase in the value of a property a valid
choice for both the lender and the borrower.
59. b — Subprime lenders are those that make loans to less qualified borrowers and will hold
the loans they originate.
60. b — Short sales are those where a lender has accepted as full consideration sale proceeds that
are short of the amount owed.
61. b — Another name for an all-inclusive trust deed (AITD) is a wraparound mortgage.
62. a — In any purchase, the original cost of the construction is of least importance.
Chapter 5: Transfer of property 83
Key Concepts
Critical real estate concepts equaling approximately 8% of the state licensing exam.
• Title insurance • Special processes
• Deeds • Transfer through court supervision
• Escrow • Types of vesting
• Tax aspects
Key Terms
Fundamental real estate vocabulary likely to appear on the state exam with reference to the
quiz questions illustrating its application. See the Real estate glossary on page 331 for the full
definitions.
Note: This section is designed to give you a broad understanding of the basic principles which
relate to the subject matter of this chapter. However, it is not exhaustive. For further reading on
this concept, see your Real Estate Principles and Legal Aspects licensing course materials.
Title insurance policies are issued on one of several general forms used by the entire title insurance
industry in California. The policies are typically issued to:
• buyers of real estate;
• tenants acquiring long-term leases; and
• lenders whose loans are secured by real estate.
Several types of title coverage are available, including:
• a California Land Title Association (CLTA) standard policy;
• an American Land Title Association (ALTA) owner’s extended coverage policy.
The CLTA standard policy is purchased solely by buyers, carryback sellers and private lenders.
The CLTA standard policy insures against all encumbrances affecting title which can be discovered by
a search of public records prior to issuance of the policy. Any encumbrance not recorded, whether
or not observable by an inspection or survey, is not covered due to the CLTA policy exclusions and
standard exceptions.
The CLTA standard policy contains pre-printed exceptions listed in the policy as Schedule B,
also called standard exceptions or regional exceptions. It is the inclusion of these pre-printed
boilerplate exceptions which makes the CLTA policy a standard policy.
An ALTA owner’s policy does not contain pre-printed exceptions, only the typewritten exceptions
listing the encumbrances which are known to the title company and affect title to the property. The
ALTA owner’s policy provides greater coverage than the CLTA policy.
The title search reviews the chain of title of a property, covering all documents of record affecting
title since the original patent was issued in 1870. The summary of this search is called an abstract of
title. From this summary, a preliminary title report is produced, and the eventual policy will be
written subject to any changes that might be made.
Chapter 5: Transfer of property 85
A preliminary title report, also called a prelim, is intended to disclose the current vesting and
encumbrances which may be reflected on the public record affecting a property’s title. A prelim is
not a representation of the condition of title or a policy of title insurance. Unlike an abstract of title,
a prelim cannot be relied on by anyone and imposes no liability on the title company.
Alternatively, an abstract of title is an accurate, factual representation of title to the property being
acquired, encumbered or leased collected from the public records. Thus, an abstract of title may be
relied on by those who order them as an absolute representation of the condition of title.
A claim, encumbrance or condition which impairs the title to real property until disproved or
eliminated is known as a cloud on title.
Deeds
A deed is a written instrument which conveys title to real estate. Title by deed passes either:
• voluntarily by agreement with the owner, as in a sale in the open market or foreclosure on a
trust deed or assessment bond; or
• involuntarily without agreement, such as the enforcement of a creditor’s judgment or tax
lien.
No matter the form of writing, the individual conveying real estate is called the grantor. The
individual acquiring title is called the grantee.
Fee simple ownership is presumed to pass by a grant of real estate, unless a lesser possessory
interest is stated, such as an easement, life estate or leasehold interest.
There are several deeds that can be used to transfer an interest in real estate. The types of deeds most
commonly used to convey a real estate interest are:
• grant deeds; and
• quitclaim deeds.
To pass a fee simple interest in real estate, only the word “grant” needs to be used in the conveyance.
No other precise words of conveyance are necessary in a deed to convey a fee simple ownership,
such as between a seller to buyer, or parent to child.
Recording is the process of placing a document on file with a designated public official known as
the County Recorder. All documents filed with the County Recorder put the general public of that
county on notice of the contents of the document. Claims against a property are generally given a
priority on the basis of the time and the date they are recorded. This type of notice is referred to as
constructive notice. Actual notice is the express or implied knowledge of a fact.
Another alternative means of transferring property is through a land sales contract. Under a land
sales contract, the seller retains title to the property until all or a prescribed part of the purchase price
has been paid.
Escrow
Escrow is a process employing an independent agent to manage and coordinate the closing of a real
estate transaction through the exchange of documents and money between two parties such as a
buyer and seller. Escrow activities are typically based on a primary agreement, such as a purchase
agreement.
Escrow agents cannot do anything without instructions from the principals, and they are equally
responsible to both parties during the escrow process. Most modern real estate sales transactions
depend on both the purchase agreement and the escrow instructions working in tandem to close a
transaction.
Both the purchase agreement and the escrow instructions are contracts regarding interests in real
estate. Both documents must be in writing to be enforceable under the Statute of Frauds.
On the close of escrow, buyers and sellers receive a credit or a charge for their proportionate share of
income or expenses involved in the ownership or operations of the property being conveyed, called
prorations.
Prorations are usually calculated based on the date escrow closes. However, they may be set based
on any date agreed to by the buyer and seller. For calculating prorations based on the date of closing,
the entire day of closing is the first day of the buyer’s ownership, unless the escrow instructions
specify otherwise.
Tax aspects
There are tax consequences to any real estate transaction.
The documentary transfer tax is imposed on a recorded document when real estate is transferred.
The transfer tax is based on the consideration paid in the transaction (the selling price minus
existing loans assumed by the buyer). The county transfer tax rate is $0.55 per $500 of transferred
value, though some cities impose an additional transfer tax as well. All transfer tax calculations
are based on multiples of this amount. The manner in which a transfer is accomplished affects the
income tax reporting for both principals.
Property taxes are paid on real property, though not personal property. Property taxes are an ad
valorem tax based on the value of the thing taxed. The original basis of valuation is the price paid
for the property. Over the years, this amount is adjusted upwards based on improvements made to
the property, and downward based on depreciation. This adjusted basis is then balanced against the
net sales proceeds (sales price minus the costs of sale) to arrive at a capital gain or loss.
No loss can be reported on a personal residence, and any gain on a personal residence can be offset
up to $250,000 for an individual or $500,000 for a couple filing jointly when reporting the sale to the
Internal Revenue Service (IRS).
88 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Property taxes in California are affected by Proposition 13 (Prop 13). Prop 13 establishes a maximum
rate of 1% of the transferred value as a basis for annual state taxes. This amount is adjusted upward by
a maximum of 2% annually, plus special service area charges by local authorities, as is the case with
Mello Roos districts.
As a tax loophole for personal use expenditures, the home mortgage interest deduction (MID)
rule for income tax reporting allows mortgaged homeowners to deduct from their adjusted gross
income (AGI) the interest paid on first and second homes to reduce their taxable income. The mortgage
interest is reported as an itemized deduction, if:
• the mortgages funded the purchase price or paid for the cost of improvements for the
owner’s principal residence or second home; and
• the mortgages are secured by either the owner’s principal residence or second home.
When the amount of permissible itemized expenditures exceeds the amount of the standard
deduction, it is more beneficial for a taxpayer to itemize their deductions.
Special processes
An occupant may also establish title to a property through adverse possession. To establish title by
adverse possession, an occupant needs to show:
• their possession is based on a claim of right or color of title;
• they have occupied the property in an open and notorious way which constitutes reasonable
notice to the record owner;
• their occupancy is hostile and inconsistent with the owner’s title;
• they have been in possession for a continuous and uninterrupted period of at least five years;
and
• they have paid all taxes assessed against the property during their occupancy.
The government may also take title to private property for public use through eminent domain, a
process called condemnation. [See Chapter 1]
Probate transfers happen in a probate court. Probate refers to the process in which the court
supervises the transfer of legal title of property from the estate of the deceased person to the decedent’s
heirs.
A tax deed is given to someone who purchases a property through a tax deed sale. The purpose of
a tax deed sale is to collect unpaid property taxes due on a property and convey title to the purchaser.
During a tax deed sale, the property is usually sold for the unpaid tax amount plus any fees, interest
charges and court costs.
Chapter 5: Transfer of property 89
Types of vesting
A vesting is a method of holding title to real estate.
Additionally, the number of joint tenants is not limited to two, as is a married couple’s ownership
of community property interests. Using one deed, any number of co-owners can take title to real
estate as joint tenants. The only ownership condition is that the joint tenants take equal ownership
interests in the property.
Traditionally, the creation of a joint tenancy requires the conveyance of four unities:
• unity of title, meaning the joint tenants take title to the real estate through the same
instrument, such as a single grant deed or court order;
• unity of time, meaning the joint tenants receive their interest in title at the same time;
• unity of interest, meaning the joint tenants own equal shares in the ownership of the
property; and
• unity of possession, meaning each joint tenant has the right to possess the entire property.
The four unities of joint tenancy can best be remembered as: time, title, interest and possession
(TTIP). Upon the death of one of the parties, the other joint tenants inherit the deceased’s interest
free of any debt obligations. Thus, other potential heirs to the deceased’s estate and creditors cannot
make claims regarding the property.
Owners may also hold property as general or limited partners or corporations. Couples may also
take title as revocable or irrevocable trusts for estate planning purposes.
90 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Exam Jargon
Specialized real estate terminology related to the transfer of property. See the Real estate
glossary on page 331 for the full definitions.
color of title mortgage interest parol evidence
escheat deduction (MID) Proposition 13 (Prop 13)
SAMPLE QUESTIONS
1. All of the following persons or entities may engage in the escrow business, except:
a. A real estate broker. c. A principal in the transaction.
b. A domestic or foreign corporation. d. An attorney.
2. Escrow calculates prorations based on days in a year.
a. 300 c. 365
b. 360 d. 370
3. Which of the following would most likely result in the termination of a real estate sales escrow?
a. The mutual agreement of the buyer and the seller.
b. The revocation by the broker for the buyer.
c. The death of the seller.
d. The cancellation of the escrow by the seller.
4. All of the following will terminate an escrow, except:
a. Agreement of the parties.
b. The broker’s order to terminate escrow.
c. One of the parties’ inability to meet a contingency.
d. The destruction of the property during the escrow
5. In an escrow statement, the term “recurring costs” is in reference to:
a. title insurance fees. c. impound account items.
b. insurance prorations. d. recording fees.
6. Escrow closes on the 16th day of February (28 days). The seller receives $500 in rent for the
month of February. The seller:
a. owes the buyer $250. c. owes the buyer less than $250.
b. owes the buyer more than $250. d. keeps the entire $500.
7. All of the following are true of a tenancy in common, except:
a. Interests may be unequal.
b. A tenant in common may not will their interest in the property to others on their death.
c. An individual owner can sell their interest without the consent of the other tenants.
d. The owner does not own a specific part of the property.
Chapter 5: Transfer of property 91
16. An American Land Title Association (ALTA) policy of title insurance goes beyond the protection
afforded by a California Land Title Association (CLTA) policy in guarding against:
a. existing liens and encumbrances as disclosed by the public records.
b. a deed of reconveyance issued by a minor.
c. the location of property lines according to a formal survey.
d. an error in the sequence of recording trust deed loans.
17. When the public records have been examined, a written summary of the chain of title is known
as a(n):
a. abstract of title. c. affidavit of title.
b. acknowledgment of title. d. title guarantee.
18. A deed is recorded and indexed based on:
a. the legal description of the property.
b. the sales price of the transaction.
c. the grantor and grantee names alphabetically.
d. the location of the property.
19. Recording is not required for a:
a. notice of default (NOD). c. homestead declaration.
b. notice of completion. d. grant deed.
20. Which of these is most correct concerning delinquent taxes and redemption rights?
a. The effect of a “sale to the state” by the tax collector is to start the redemption period
running.
b. The state sale gives notice to the owner they need to vacate the property with 180 days.
c. In the event the delinquent owner transfers or otherwise alienates the property, the
redemption period is automatically terminated.
d. The property is automatically deeded to the state if the property is not redeemed within
one year.
21. The annual property taxes an owner of a home needs to pay are determined by:
a. assessing the land and improvements separately, then multiplying the total by one tax
rate.
b. assessing the land and improvements together, then multiplying by one tax rate.
c. assessing the land and improvements separately, then multiplying by different tax
rates.
d. subtracting the value of the improvements from the value of the land, then multiplying
the total by one tax rate.
22. Which of the following is an ad valorem tax?
a. Income tax. c. Real estate tax.
b. Use tax. d. Value added.
23. During a sales escrow, the escrow officer receives two structural pest control reports. The escrow
officer is to:
a. contact the inspection companies to determine which one controls.
b. send the report that requires the most work to the buyer and obtain their approval.
c. notify the buyer and seller of the discrepancy and obtain written instructions as to
which report to use.
d. use the report which found the least amount of infestation and damage.
Chapter 5: Transfer of property 93
34. A land contract, when compared to a grant deed transfer, is different in the:
a. interest conveyed. c. designation of purchase price.
b. signatures of the principal parties. d. All of the above.
35. A property in probate is appraised at $960,000. At auction, the highest bid is $900,000. For the
court to consider any other offer, it would have to be at least:
a. $900,001. c. $1,008,000.
b. $945,500. d. $945,000.
36. A writ of execution is issued for a(n):
a. sheriff’s sale. c. attachment.
b. transfer by adverse possession. d. trustee’s sale.
37. When an eligible veteran purchases a home under the CalVet program, the grant deed is in
favor of:
a. the veteran.
b. the California Department of Veterans Affairs.
c. the lender that made the CalVet loan.
d. the title company.
38. To establish title by adverse possession, an occupant must show:
a. they have occupied the property in a way which constitutes no notice to the record
owner.
b. their occupancy is consistent with the owner’s title.
c. they have been in possession of the property for a continuous and uninterrupted period
of at least two years.
d. they have paid all taxes assessed against the property during their occupancy.
39. Chain of title refers to:
a. an exact history of conveyances and encumbrances affecting title to a property.
b. a title report.
c. equity held in a property plus the debt encumbering it.
d. abstract of title.
40. An offer based on a $300,000 loan assumption was made and accepted. During escrow, it was
discovered the loan was for $290,000, not $300,000. What is the most probable outcome?
a. The seller needs to accept the buyer’s note of $10,000.
b. The buyer needs to come up with $10,000 more in cash.
c. The buyer can void the contract.
d. The seller needs to reduce the price by $10,000.
41. Mike executed a grant deed to Trevor and recorded it. Later, Mike changed his mind and sought
to set the conveyance aside, claiming there had been no delivery to Trevor. Why was Mike
unsuccessful in his effort?
a. Delivery and acceptance is presumed with recording.
b. He was unsuccessful only if Trevor can prove he took possession.
c. Recording creates an entry on the chain of title.
d. Recording acknowledges the deed.
Chapter 5: Transfer of property 95
42. All of the following may be impound requirements for a borrower, except:
a. property insurance. c. property taxes.
b. bond payments. d. mortgage interest.
43. Anna sold her primary residence for $950,000. She originally paid $750,000 for the property
four years ago. She spent $300,000 on capital improvements during her ownership. What can
Anna write-off when filing her tax return?
a. $200,000 gain. c. $100,000 loss.
b. $500,000 gain. d. None of the above.
44. Mr. Black purchased a home for $650,000. The terms of the sale stated Mr. Black will make
a down payment of $200,000 and assume an existing first trust deed for the balance of the
purchase price. At a basic rate of $0.55 per $500, how much will the transfer tax be?
a. $715.00 c. $495.00
b. $220.00 d. $357.50
45. The original cost basis on a duplex purchased by Mr. Brown was $750,000. The tax assessor
stated the breakdown of values to be 80% improvements and 20% land. Over the first five
years, Mr. Brown depreciated the improvements at a rate of 2% each year. Mr. Brown then
hired a licensed contractor to install a swimming pool at a cost of $50,000. Once the pool was
completed, how much will the adjusted cost basis in the property be?
a. $725,000. c. $785,000.
b. $740,000. d. $792,000.
ANSWER KEY
1. c — A principal in the transaction cannot perform as an escrow agent in the same transaction
as they are not impartial or neutral.
2. b — Escrow works on a 30 day month multiplied by 12 months. Thus, for the purpose of
calculating prorations, escrow considers there to be 360 days in a year.
3. a — Escrow can be cancelled by mutual agreement between both principals, not
unilaterally by one party. The broker is not a party to the escrow, therefore, they cannot
authorize termination. In the event of the death of either party, their estate is still responsible
for performing.
4. b — The broker is not a principal to the escrow and therefore has no authority to cancel it. A
mutual agreement between the parties or the failure of a contingency to occur will cancel the
escrow, as will the destruction of the property during the escrow.
5. c — “Recurring” means costs that will repeat. In this question, only impounds are recurring.
6. a — Remember, escrow calculates a month as 30 days, as stated in Question 2 so disregard the
reference to the literal number of days in the month. The 16th day of the month is first day of
the second half of the month and thus the seller owes the buyer precisely half of $500.
7. b — Answer selections A, C and D are true of a tenancy in common, as distinct from a
community interest such as joint tenancy. However, a tenant in common may will their
interest in the property to others on their death.
8. d — The word “severalty” is similar to “sever.” Thus, a person holding title to real property in
severalty has sole ownership of a property.
9. a — Answer selections B, C and D are not covered under real estate licensure.
96 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
10. b — Joint tenants receive title clean of any obligations made by the deceased partner. Further,
joint tenants do not need to be married and joint tenancy is not limited to only two people.
11. b — Time, title, interest and possession (TTIP) relate to joint tenancy only.
12. c — Both the California Land Title Association (CLTA) standard and American Land
Title Association (ALTA) policies provide coverage for all answer selections except C.
13. b — Only the American Land Title Association (ALTA) policy will give additional coverage,
such as for encroachments and prescriptive easements. Incompetence of any of the parties is
covered by both standard and extended policies.
14. d — Only the American Land Title Association (ALTA) policy covers these items. Recognize
how information in this question can make it possible to answer other questions regarding
alternative title insurance policies.
15. b — On April 5th the seller will still be the owner and the trustor on the Federal Housing
Administration (FHA) loan. Thus, answer choice B is the only correct answer.
16. c — Answer selection C is one of the extended benefits of an American Land Title Association
(ALTA) policy.
17. a — Note the words “chain of title” in the question, which is something that may also be
covered in another question. The record of title is summarized in the abstract of title.
18. c — The names of both parties to the transfer are named and indexed accordingly.
19. d — A grant deed is valid whether or not it is recorded.
20. a — The redemption period begins with the sale.
21. a — The land and improvements are valued separately though the tax rate is the same.
22. c — Ad valorum is the tax assessor’s valuation for real estate.
23. c — Remember, only the principals can make decisions about transaction terms to escrow.
24. b — A bill of sale is used to transfer personal property.
25. d — Mortgage payments are the exception. The other three answer selections have similarities
and may be added to the original cost basis of real property to arrive at an adjusted basis for
federal income tax purposes.
26. d — Answer selection D is the only option that is not tax deductible for owner-occupied
residences.
27. d — Delinquent interest is a seller expense and not prorated for the buyer.
28. d — Transfer stamps come in multiples of $0.55.
29. a — The answer to this question is contained in the language of the question itself.
30. d — A deed does not need to be recorded to be valid, but must be recorded to give constructive
notice (answer selection A).
31. a — The quitclaim deed is the exception here. There are no guarantees or warranties with a
quitclaim deed.
32. d — A signature completes the execution. The transfer process requires delivery and
acceptance to be complete.
33. c — An inconsistency in the names of the title holder and grantor on the deed will require
clarification, creating a cloud on title until this has been accomplished.
34. d — All of these will differ between a contract and a deed.
Chapter 5: Transfer of property 97
35. b — A probate court will only consider a subsequent bid that is raised by an amount equal to
10% of the first $10,000 ($1,000), plus 5% on the balance ($44,500).
36. a — A sheriff’s sale will cause a writ of execution to be drawn and recorded.
37. b — The CalVet sale is a land sales contract with the California Department of Veterans
Affairs as the seller (vendor).
38. d — Only answer choice D fits the requirements for adverse possession. The period of
possession must be at least five years, not two. This is why answer choice C is incorrect.
39. a — This is an example of one question delivering the answer to a different question. Another
question in this section defines the chain of title as a written summary of public records.
40. c — This is an example of a contingency in an escrow. This contingency favored the buyer and
allowed them to void the sale since the loan balance was not as previously stated.
41. a — The transfer process requires delivery and acceptance to be complete. Recording presumes
delivery and acceptance since the recorded deed is mailed to the grantee.
42. d — The exception here is mortgage interest. The other three answer selections are related
in that monies are accumulated in the impound account against an annual or semi-annual
payment.
43. d — First, determine the amount of the capital gain or loss. $750,000 purchase + $300,000
improvements = $1,050,000 adjusted basis. A sale price of $950,000 creates a $100,000 capital
loss. However, capital losses are not permitted on a primary residence.
44. b — Transfer taxes are charges against new money only. Since the transaction included the
assumption of a $450,000 existing mortgage, the only tax charged is against the $200,000 down
payment. The transfer tax rate in the county where the property is located is $0.55 per $500,
which equals $1.10 per $1,000. Multiply $1.10 by 200, totaling $220 in transfer taxes paid on
the sale.
45. b — Depreciation can only be taken on the improvements (80%) portion of the purchase
price. In this example: 80% x $750,000 = $600,000 (improvement portion of the original basis).
$600,000 x 0.02 (2%) = $12,000 per year x 5 years = $60,000 (accrued depreciation). Then, subtract
the accrued depreciation from the original cost basis. $750,000 (original cost basis) - $60,000
(accrued depreciation) = $690,000 (depreciated cost basis). Finally, add $50,000 for the new
swimming pool improvement + $690,000 (depreciated cost basis) = $740,000 (adjusted cost
basis).
Notes:
Chapter 6: Practice of real estate and disclosures 99
Key Concepts
Critical real estate concepts equaling approximately 25% of the state licensing exam.
• Trust account management • Property management
• Fair Housing laws • Commercial/Industrial/Income
• Truth in advertising properties
• Record keeping requirements • Specialty areas
• Agency supervision • Transfer Disclosure Statement (TDS)
• Permitted activities of unlicensed sales • Natural Hazard Disclosure Statement
assistants (NHD)
• DRE jurisdiction and disciplinary • Disclosure of material facts affecting
actions property value
• Licensing, continuing education • Need for inspection and obtaining /
requirements and procedures verifying information
• California Real Estate Recovery Fund • Reports
• General ethics • Servicing diverse populations
• Technology
Key Terms
Fundamental real estate vocabulary likely to appear on the state exam with reference to the
quiz questions illustrating its application. See the Real estate glossary on page 331 for the full
definitions.
abandonment (q. 57) bulk sale (q. 15) comparative market analysis
advertising (q. 2, 10-12) certificate of clearance (q. 16) (CMA) (q. 3)
Americans with Disability commingling (q. 20, 21) Department of Real Estate
Act (ADA) (q. 9) commission (q. 4, 8, 22, 28) (DRE) (q. 18)
anti-trust (q. 13) common area (q. 58) disclosure (q. 23-25)
blockbusting (q. 14, 71) due diligence (q. 59)
100 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Note: This section is designed to give you a broad understanding of the basic principles which
relate to the subject matter of this chapter. However, it is not exhaustive. For further reading on
this concept, see your Real Estate Principles and Real Estate Practice licensing course materials.
Monies collected on behalf of a client need to be deposited no later than three business days after
receipt. A broker may maintain a maximum of $200 in the account to offset bank fees.
The commingling of client funds with other client monies is one of the primary causes of licensee
disciplinary action. Similarly, conversion occurs when a licensee uses the client’s funds for their
own purposes.
Chapter 6: Practice of real estate and disclosures 101
Any employee may be authorized by the broker to withdraw monies from the trust fund. If the
authorized person is not licensed, they need to have a fidelity bond for an amount equal to what
they can access.
A trust account ledger must be maintained even when client funds are not cashed but transferred
to escrow or title companies. Ledgers and trust accounts are to be balanced monthly.
If a broker owns an apartment building, the monies from this property are to be handled separately
from that of the clients and not deposited in a client trust account.
Many questions on the state exam will be asked about discrimination and what is ethically and
legally correct. Consider the protected groups covered by these laws, and recognize that the public
policy goal is to have a color-blind society that treats all people the same.
These are some of the key points and terms concerning discrimination:
• redlining – a lender or insurance company refusing to do business within a geographic area;
• steering – a licensee attempting to show prospective buyers and tenants only properties they
deem appropriate, rather than what the client wants to see;
• blockbusting and panic selling – an attempt to influence sales or rentals of real estate
by exploiting the prejudices of property owners in a neighborhood. For example, a licensee
attempting to secure a listing to sell a residential property by telling the seller the neighborhood
demographics are changing, and they need to sell now before the change occurs;
• implicit discriminatory practices – those which are not openly discriminatory, but result
in discriminatory effects;
• complaints must be filed with the Department of Housing and Urban Development
(HUD) within one year of the discriminatory act; and
• victims of housing discrimination can enforce their rights by filing civil court cases in federal
court, state or local courts or by filing a complaint with HUD.
Additional California Fair Housing laws include:
• the Fair Employment and Housing Act (Rumsford Act) which prohibits discrimination
in supplying housing accommodations and is overseen by the Department of Fair
Employment and Housing;
• the Housing Financial Discrimination Act (Holden Act) which protects against
discrimination in lending practices; and
• the Unruh Civil Rights Act which prohibits discrimination in businesses.
Truth in advertising
A licensee’s name and license number needs to be contained in all of their advertising intended to be
the first point of contact with a potential client, including business cards.
A blind advertisement is an ad that neither names the broker nor states a licensed agent is involved.
Buyer gifts, such as movie tickets or wine, are permissible so long as they are:
• available to everyone; and
• any obligation, such as attending a presentation, is clearly disclosed.
Chapter 6: Practice of real estate and disclosures 103
The hard copies must be made available to the Department of Real Estate (DRE) upon request.
Agent supervision
A broker is responsible for the actions of licensees working under their license. In order to demonstrate
proper supervision, brokers need to implement a combination of training and oversight.
The risks taken by a broker and their agents expose the broker to liability caused by an:
• error;
• omission; or
• misunderstanding brought about by the activities of the broker or their agents.
All acts carried out by a broker or their agents present the possibility that a client or other party will
be injured financially.
It is the risk of causing these losses which the broker needs to control. Thus, brokers need to maintain
a risk reduction program to keep claims from clients and others under control.
As a buffer against liability, a broker can purchase negligence insurance, called errors and
omissions insurance, or more simply, E and O insurance. With the payment of a premium, E and
O insurance protects brokers from the full cost of defending against a negligence claim made by a
client or others.
An unlicensed assistant may write up documents including contracts and comparative market
analyses (CMAs), so long as they are reviewed by the broker. They may also host an open house
provided they do not answer questions regarding the price and terms.
As with an office receptionist, they may take telephones calls but need to refer the call to a licensed
agent once it is determined the call is in response to a sign or advertisement. Further, they may not
induce anyone to use their employing broker’s services, or make any solicitation regarding a specific
property, transaction or product.
104 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Any unlicensed person may locate prospective buyers, sellers, borrowers, tenants or landlords for
referral to a broker’s services as an “unlicensed finder” for a fee.
Finders need to be hired under written contracts of employment. These employment contracts will
delineate the finder’s responsibilities and limit their conduct to activities permitted by regulations
for their unlicensed statuses. Finders may be compensated by:
• a salary;
• a percentage fee; or
• a lump sum basis per closing.
The chief officer of the DRE is the Real Estate Commissioner. The Real Estate Commissioner’s
principal responsibility is to enforce all the real estate laws pertaining to real estate licensing and the
Subdivided Lands Law.
The Commissioner ensures that real estate licensees and members of the public dealing with licensees
receive maximum protection.
As a means of enforcing licensing and subdivision laws, the Commissioner promulgates rules and
regulations addressing conduct of persons falling within the real estate law activities. The regulations
are part of the California Code of Regulations known as Title 10.
The DRE may fine, suspend or revoke a license. Legal actions such as fraud are dealt with by the
Justice Department.
The Commissioner also has authority over developers through the Subdivided Lands Law.
The DRE does not hear commission disputes, which are settled by civil lawsuits.
A real estate broker is a person who, for compensation or in expectation of compensation, engages in:
• negotiating the sale, purchase or exchange of real estate, leases or business opportunities;
• soliciting listings from buyers or sellers;
• leasing or renting, or offering to lease or rent, property on behalf of an owner or tenant;
• collecting rent from real estate or business opportunities;
• assisting in the purchase or lease of property owned by the state or federal government;
Chapter 6: Practice of real estate and disclosures 105
• negotiating real property sales contracts or loans to be secured by real estate or business
opportunities on behalf of lenders or borrowers; and
• negotiating the sale or purchase of mobilehomes.
To be eligible for a broker or sales license, the applicant needs to:
• be at least 18 years old;
• be honest and truthful;
• provide proof of legal presence in the U.S.;
• make the application on the proper form prescribed by the DRE;
• complete the mandatory education; and
• pass the qualifying exam.
A real estate broker and real estate sales license is valid for four years from the date of issuance noted
on the license certificate.
All real estate brokers and sales agents need to complete at least 45 hours of continuing education
(CE) to renew a license issued by the DRE.
The CE requirements for license renewal were legislated to help maintain and improve the level of
competence of real estate brokers and agents.
The DRE sales agent renewing for the first time needs to complete 45 hours of CE, consisting of:
• 18 hours of Consumer Protection courses;
• 15 hours comprised of five separate three-hour courses in:
° Agency;
° Fair Housing;
° Trust Funds;
° Ethics; and
° Risk Management; and
• the remaining 12 hours composed of either Consumer Protection or Consumer Service
courses, including Office Management and Supervision course if they choose to take it.
While brokers and sales agents beyond their first renewal are required to include the Office
Management and Supervision course in their 45 CE hours, the DRE allows them the option of
choosing how to study it. A licensee may study the Office Management and Supervision material
separately or aggregated into an eight-hour “survey” course with the five mandated courses.
If the licensee fails to renew prior to their expiration date, they enter a two-year grace period. They
may not practice real estate when their license is expired.
A licensee’s license will be suspended and will not be reinstated until the licensee repays any
amounts paid from the Real Estate Recovery Fund to satisfy a judgment against them, plus interest.
General ethics
Ethics are a set of values which guide a licensee’s behavior towards others. Ethical and legal
guidelines are covered in the Business and Professions Code.
For the purpose of taking the state exam, presume that any question that asks whether it is illegal or
unethical should be presumed to be illegal.
Recognize that unusual contracts between clients and licensees, such as net listings and listings
with options to purchase, require a greater amount of transparency – full disclosure on the
part of the licensee.
Pocket listings – holding a signed listing contract rather than submitting it for exposure to the
general public on the Multiple Listing Service (MLS) – are unethical unless explicitly authorized by
the seller. Fiduciary duty requires a maximum effort to advertise a property on behalf of the seller. To
hold the listing without releasing it on the MLS creates a conflict of interest since the salesperson’s
purpose for doing so is to receive both sides of the commission.
A conflict of interest arises when a broker or their agent, acting on behalf of a client, has a competing
professional or personal bias which hinders their ability to fulfill the fiduciary duties they have
undertaken on behalf of their client.
However, fees and benefits derived from conflicting sources must be disclosed to the client. This
includes compensation in the form of:
• professional courtesies;
• familial favors; and
• preferential treatment by others toward the broker or their agents.
Technology
Modern technology has allowed for more efficient record keeping, documentation and marketing to
be done by computer and through the internet.
Licensees need to remember the time requirements for the storage of records (three years) and the
need to be able to recover that data if required by courts or by a DRE audit. Brokers also need to
recognize their responsibility for approving and supervising any internet marketing.
Chapter 6: Practice of real estate and disclosures 107
Property management
The management of client properties requires a broker license. A broker has the authority to act as
a property manager by virtue of their DRE license alone. There is no special “property management”
license or endorsement required under California law.
For exam questions concerning the relationship between the property manager and the tenant,
many of the Fair Housing principles discussed above apply.
A property manager’s authority to take possession and control of income-producing real estate and
manage its leases, rents, expenses, mortgage payments and accounting in expectation of a fee is
established in a property management agreement. The property management agreement sets
out the specific rights, responsibilities and expectations of the property manager and the landlord,
and includes authorized activities, performance standards and expense limitations.
Compensation for the manager can be a flat rate or a percentage of monies collected. Compensation
can never be a kickback or discount on materials or services paid by the owner.
A security deposit is security for the tenant’s default on obligations agreed to in the rental or lease
agreement. The maximum security deposit equals two months’ rent for an unfurnished rental
and three months’ rent for a furnished rental unit. No other consideration affects the maximum
amount that can be demanded.
After a tenant has surrendered the unit, the property manager has 21 days to return any unused
deposit along with an explanation of how the monies were used.
Commercial/Industrial/Income properties
While most real estate licensees are involved in residential property sales and leasing, no additional
licensing requirements exist for the sale or leasing of commercial, industrial or income-producing
properties.
Specialty areas
A business opportunity is the sale or lease of the operations and goodwill of an existing business
enterprise or opportunity. The arranging of a sale or purchase of a business opportunity is governed
by the DRE. To receive a fee for the sale of a business opportunity, it is necessary to hold a real estate
license, unless the person receiving the fee is licensed as a securities broker or dealer by California
or the United States.
In the sale of a retail business, other considerations exist, such as the buyer’s request for a certificate
of clearance from the State Board of Equalization (SBOE) to assure the sales tax has been paid up
to the close of escrow. Other considerations include approvals by government agencies and building
departments, as well as acquisition of city business permits and permits by the Alcohol Beverage
Control (ABC) in regards to alcohol licenses.
Franchises are business opportunities, as in the right to conduct business using the franchisor’s
business plan.
Mobilehomes have a unique legal status, being either real estate or personal property.
The broker handling the sale of a mobilehome that is considered real estate conducts themselves as
they would on the sale of any type of real estate.
The rules for buying, selling, registering and encumbering mobilehomes that are not considered real
property differ from the rules for real estate sales.
The government agency responsible for the registration of mobilehomes is the California
Department of Housing and Community Development (HCD). Mobilehomes are registered
with the HCD, unless the mobilehome is considered real estate.
When a new mobilehome is first purchased, it is registered on a form provided by the HCD referred
to as the original registration of the mobilehome.
At the time of the original registration of the mobilehome, the HCD creates a permanent title record
for the mobilehome. The real estate licensee can only handle sales of a mobilehome subsequent to
the original registration.
The state mandated disclosure form requires the seller to state all known material facts affecting the
property’s value and desirability. The seller’s mandated use of the TDS requires it be prepared with
honesty and in good faith, whether or not a seller’s agent is retained to review its content.
Further, the listing agent is expected to make a thorough inspection of the property and report
honestly what is observable. The licensee may not fill-out the seller’s portion of the form.
The TDS is required even when the property is being sold “as is” or when the property is sold by the
owner without an agent, known as a For Sale By Owner (FSBO).
Transactions which exempt the seller (but not the seller’s agent) from preparing and delivering the
statutory TDS to the buyer include transfers:
• by court order, such as probate, eminent domain or bankruptcy;
• by judicial foreclosure or trustee’s sale;
• on the resale of real estate owned property acquired by a lender on a deed-in-lieu of foreclosure,
or by foreclosure;
• from co-owner to co-owner;
• from parent to child;
• from spouse to spouse, including property settlements resulting from a dissolution of marriage;
• by tax sale;
• by reversion of unclaimed property to the state; and
• from or to any government agency.
A buyer has two years to bring an action against a licensee for failure to disclose a known material
fact.
If the TDS is belatedly delivered to the buyer, the buyer has three days after personal delivery or
five days after mailed delivery to terminate the offer in writing.
The existence of a hazard due to the geographic location of a property affects its desirability, and
thus its value to prospective buyers. Hazards, by their nature, limit a buyer’s ability to develop the
property, obtain insurance or receive disaster relief.
Whether a seller lists the property with a broker or markets the property themselves, the seller must
disclose to prospective buyers any natural hazards known to the seller, including those contained
in public records.
To unify and streamline the disclosure by a seller (and in turn the seller’s agent) for a uniform
presentation to buyers concerning natural hazards which affect a property, the California legislature
created a statutory form entitled the Natural Hazard Disclosure Statement (NHD).
Generally, seller’s agents are not required to voluntarily disclose information to a potential buyer
regarding a prior occupant whose death, from any cause, occurred on the real estate more than three
years prior to the purchase offer, or who was afflicted with HIV or AIDS. However, if a death on the
property for some reason adversely affects the market price of the property, it must be disclosed.
However, on direct inquiry by the buyer or the buyer’s agent about deaths on the property, the
seller’s agent must disclose their knowledge of any deaths on the real estate, no matter when they
occurred. An intentional concealment of a death after a buyer makes a direct inquiry is a breach of
the seller’s agent’s general duty and the buyer’s agent’s agency duty.
All property information received from a seller is reviewed by the seller’s agent for inaccuracies or
untruthful statements. However, a seller’s agent need not investigate the seller’s claims any further
before using the information to market the property so long as they are not known to the agent to be
false.
An agent can hire a home inspector to generate a home inspection report (HIR) used to prepare
the seller’s TDS, releasing the seller’s agent of liability. However, if the seller or seller’s agent is aware
of a material fact that is not reported by the inspector, neither is relieved of liability. Further, use of
an HIR by the seller’s agent in the preparation of the TDS does not relieve the agent from conducting
their mandatory visual inspection.
Reports
There is a wealth of information for both consumers and licensees available through the DRE website,
www.dre.ca.gov. In the upper right-hand corner above the search bar, the Publications tab provides
access to a full library of publications and reports produced by the agency.
All exam question of this nature are rooted in these same public policy objectives.
Exam Jargon
Specialized real estate terminology related to the practice of real estate and disclosures. See the
Real estate glossary on page 331 for the full definitions.
caveat emptor panic selling subrogation
forfeiture ratification
hazardous waste rent skimming
112 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
SAMPLE QUESTIONS
1. All of the following are requirements for licensing as a real estate salesperson, except:
a. ownership of property. c. being honest and truthful.
b. being eighteen years or older. d. getting fingerprinted.
2. A real estate broker’s advertisements need to include:
a. the name of the broker and license number.
b. a statement that the advertiser is a broker or agent.
c. the address of the broker.
d. the number of years the broker has been licensed.
3. An unlicensed assistant may:
a. show property to prospective buyers.
b. encourage a prospective client to use the broker’s services.
c. discuss the terms or conditions of a possible sale.
d. prepare a comparative market analysis (CMA) for a client.
4. Roland, a broker, arranges a sale and opens escrow. Before escrow closes, his license is revoked
by the Department of Real Estate (DRE). What happens to Roland’s commission?
a. Roland’s commission goes to the Real Estate Education Research and Recovery Fund.
b. The seller does not have to pay any commission.
c. The commission is split between the buyer and seller.
d. Roland gets his commission.
5. Real estate licenses are issued for:
a. one year. c. four years.
b. two years. d. life.
6. Robert, a developer who is unlicensed, hires Yvonne, a broker, to sell his properties. While
Yvonne is out of town, Robert shows property, quotes prices and makes sales. Have Robert or
Yvonne violated the Real Estate Law?
a. Yvonne has violated the Real Estate Law and can be fined $500.
b. Robert has violated the Real Estate Law and can be fined $500.
c. Both Robert and Yvonne have violated the Real Estate Law.
d. Neither Robert nor Yvonne has done anything wrong.
7. Which of the following is true?
a. Every real estate broker needs to maintain a definite place of business in California.
b. An advertisement must include the licensee’s name and license number.
c. Both a. and b.
d. Neither a. nor b.
8. A salesperson’s commission is paid by:
a. the seller. c. escrow.
b. the broker. d. the buyer.
Chapter 6: Practice of real estate and disclosures 113
17. The best guideline to determine whether an action is ethical can be found in:
a. state legislation.
b. the Business and Professions Code.
c. the Preamble of the National Association of REALTORS®.
d. what is in the best interest of the real estate licensee.
18. A prospective buyer is interested in purchasing a vacant lot in a rural subdivision. The buyer
wishes to know about sewer assessments, liens, utilities to the lot, blanket encumbrances and
street maintenance. The source that provides all of this information is the:
a. county planning director. c. county engineer.
b. county Board of Supervisors. d. Real Estate Commissioner.
19. If a licensee’s name is on a list of obligors who have not complied with a court-ordered payment
of child support, the licensee’s renewal application will:
a. renew as a suspended license until paid.
b. be suspended until they have paid the delinquent amount.
c. renew as a temporary license, but the debt must be paid within 150 days.
d. be renewed for a one-year term only, unless the licensee submits proof from the District
Attorney the debt has been paid.
20. State regulations in California contain a statement that prohibits discrimination due to race,
color, religion, marital status, national origin, or ancestry. Discrimination in which of the
following areas would not be a direct violation of the Rumsford Act?
a. Unimproved land to be used for a home.
b. Vacant housing accommodations.
c. Four unit apartment building.
d. Unimproved land to be used for a commercial development.
21. Commingling involves the mixing of one client’s monies with:
a. the brokerage firm’s general account. c. the sales licensee’s personal account.
b. other clients’ monies. d. Any of the above.
22. In California, commission fees charged on residential properties cannot exceed:
a. 6% as set forth in the Real Estate Law.
b. an amount which is determined by the broker’s contract with their principal.
c. 8% of the total sales price of a residence.
d. any amount determined by local custom.
23. A seller’s broker sold a property to a buyer. Four months later, when the first rains of the
season began, the buyer discovered significant roof leaks. The buyer sued both the seller and
the broker for the cost of repairs. The seller sued the broker in the same action since the seller
had informed the broker numerous times that the building needed a new roof. The broker’s
testimony in court revealed the broker was aware of the leaky roof but had not mentioned it to
the buyer since the issue of the leaking roof was not mentioned by the buyer. What is the most
likely result of the court action?
a. On the basis of the principle of caveat emptor, the buyer is not entitled to recover from
either the broker or the seller.
b. The buyer may recover from the broker, but the seller would not be liable.
c. The buyer may recover from the seller, but the broker would not be liable.
d. The buyer may recover from both the seller and the broker. Further, the seller would
recover in the suit against the broker.
Chapter 6: Practice of real estate and disclosures 115
24. A real estate broker takes listing on a residential property. The broker likes the property and
chooses to buy it in the name of a separate investment company he owns. Which of the
following statements is most correct?
a. The broker has failed to serve the client’s best interests and cannot collect a fee.
b. The broker may offer to purchase the property, but must first disclose to the seller that
they are the buyer.
c. The broker may purchase the property, but may only accept half of his agreed-to fee.
d. The broker need not disclose his interest in the investment company, so long as he is
not the sole owner of it.
25. All of the following copies a buyer of a common interest development (CID) is entitled to
receive, except:
a. a homeowner warranty.
b. the governing conditions, covenants and restrictions (CC&Rs).
c. the homeowners’ association (HOA) bylaws.
d. the HOA’s financial statement.
26. Under the Alquist-Priolo Special Studies Act, a subdivider is required to disclose to potential
purchasers:
a. earthquake fault lines. c. environmental issues.
b. flood hazard zones. d. the existence of nearby military
ordinances.
27. Under no circumstances may a real estate broker misrepresent a material fact to a buyer. If
they do, the broker faces:
a. disciplinary action by the Department of Real Estate (DRE).
b. criminal action.
c. civil action.
d. Any of the above.
28. It is least likely to be a violation of the Real Estate Law for a broker to pay a portion of the
commission to a(n):
a. unlicensed assistant.
b. a salesperson working for another broker.
c. unlicensed person who obtained the listing.
d. buyer or seller in the transaction.
29. A Natural Hazard Disclosure Statement (NHD) needs to be given to a buyer when a natural
hazard exists. All of the following trigger delivery of an NHD, except:
a. A property located in a very high fire hazard severity zone.
b. A property that contains lead-based paint.
c. A property located in an earthquake fault zone.
d. A property situated in a special flood hazard area.
30. Earthquake fault zones need to be disclosed to prospective buyers of certain properties in
California. Typically, earthquake fault zones are:
a. 0.25 miles wide. c. 1 mile wide.
b. 0.5 miles wide. d. 2.5 miles wide.
116 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
40. The purpose of a(n) , like an easement and a lease, is to grant the right to use property
owned by another person.
a. encumbrance c. unlawful detainer (UD)
b. personal privilege d. license
41. Roy, an inactive real estate salesperson, offers to assist Mel lease or purchase federal land for a
fee.
a. Roy can legally arrange a lease or sale for a fee since the land is federally owned.
b. Roy must be a broker to perform these duties and collect a fee.
c. Roy is subject to disciplinary action from the Department of Real Estate (DRE).
d. Roy is committing a federal crime.
42. After an applicant passes the real estate licensing exam, they need to apply for a license within:
a. one year of the examination.
b. one year after being notified of the test results.
c. two years from the date of the exam.
d. six months of being notified of test results.
43. Which of the following is an example of “puffing”:
a. convincing the seller to pay a high commission.
b. convincing an appraiser to place an unrealistic value on the property.
c. exaggerating certain features or benefits of a property.
d. stating an opinion that sounds like fact.
44. All of the following are appropriate ways for real property managers to be compensated, except:
a. a commission for new tenants solicited.
b. a percentage of the total gross rents received.
c. additional compensation for supervising renovations and improvements.
d. receiving kickbacks from contractors and suppliers.
45. Who is authorized to manage property for the general public?
a. A responsible adult. c. A licensed real estate broker.
b. Only a Certified Property d. An escrow officer.
Manager (CPM).
46. An unlawful detainer (UD) action is instigated by:
a. a grantor. c. a lessor.
b. a trustee. d. a real estate broker.
47. The purpose of the Real Estate Law is to:
a. prevent fraud. c. keep track of all real estate transactions.
b. protect the public. d. limit competition.
48. Most real estate records need to be kept for a period of three years, commencing from the date
that a property is first listed or the date:
a. the agent meets a client. c. escrow closes.
b. the sale occurs. d. the buyer’s first property tax bill is due.
49. When a purchase agreement states the property is being sold “as is,” it:
118 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
a. still requires the buyer to receive a Transfer Disclosure Statement (TDS) noting any
material facts which affect the property’s value.
b. puts the buyer on notice they should beware.
c. underscores the fact that nothing is warranted.
d. releases the seller of the requirement to deliver a TDS to the buyer or make any
disclosures about the condition of the property.
50. An example of a red flag would be:
a. a cited code violation. c. a floor that is not level.
b. a home overbuilt for the neighborhood. d. an older home.
51. The Transfer Disclosure Statement (TDS) form is required on:
a. the sale of a one-to-four unit residential property.
b. the sale of a commercial building.
c. all foreclosure sales.
d. the sale of vacant land.
52. If a seller refuses to fill out their section of the Transfer Disclosure Statement (TDS), the seller’s
agent is advised to:
a. give written notice to the buyer of their right to receive such a TDS.
b. accept the listing and obey the seller’s direction not to disclose any negative property
issues.
c. complete the listing agent’s portion of the TDS and deliver it to the buyer without the
seller completing their section of the form.
d. obtain the buyer’s waiver of their right to receive a copy of the TDS.
53. The total positive balances due to all beneficiaries of a broker’s trust account need to at all times
equal the account’s:
a. shortage. c. overage.
b. balance. d. fidelity bond coverage.
54. Both a seller and a buyer ask the broker to give them the trust funds deposited by the buyer.
How is the broker to respond?
a. Begin a surrender action.
b. Turn the funds over to the Real Estate Recovery Fund.
c. Declare an equitable assignment of the funds.
d. Commence an interpleader action to resolve the dispute.
55. Freddie, an unlicensed employee of a real estate broker, hands out door hangers and makes
telephone solicitations seeking buyers and sellers. Under the real estate law, these activities
are:
a. unethical for the broker who employs Freddie as an unlicensed employee.
b. commonly accepted behavior in the brokerage community.
c. unlawful for Freddie.
d. unlawful for both Freddie and his employing broker.
56. An unlicensed assistant in a real estate office cannot:
a. sit at open houses conducted by the broker’s office.
b. type listings and sales contracts for licensees.
c. hand out brochures.
d. discuss the price and term of a transaction with a principal.
57. An abandonment can be noticed and carried out when a tenant stops paying rent and:
Chapter 6: Practice of real estate and disclosures 119
67. The act of restricting a person from seeking to buy a residential property in a community and
redirecting them to other housing is known as:
a. steering. c. redlining.
b. driving. d. panic peddling.
68. A sublease:
a. is similar to an assignment.
b. transfers a portion of the leasehold interest.
c. transfers the entire leasehold interest.
d. cannot exceed one year.
69. A surrender occurs due to the cancellation of the lease agreement by:
a. the actions of the tenant only.
b. the actions of the landlord only.
c. the mutual consent of the landlord and the tenant.
d. the abandonment of the tenant.
70. Which of the following is an example of personal property?
a. An appurtenant easement.
b. Trade fixtures.
c. Fixtures installed in a property for manufacturing purposes.
d. Mineral rights.
71. The Real Estate Commissioner may discipline a broker for committing which of the following
violations of Fair Housing law?
a. Blockbusting.
b. Steering.
c. Hiring salespersons from only one specific ethnic group.
d. All of the above.
72. Sexual discrimination in housing is outlawed in sales and rentals under the:
a. Fourth Amendment. c. Civil Rights Act of 1968.
b. Eighteenth Amendment. d. Uniform Fair Housing Act.
73. Title VIII, also known as the Federal Fair Housing Act, refers to the:
a. Civil Rights Act of 1968. c. Civil Rights Act of 1964.
b. Unruh Act. d. Civil Rights Act of 1866.
74. A resident manager in an apartment building is required to have a contractor’s license for any
repairs exceeding:
a. $300.
b. $500.
c. $1,000.
d. No contractor’s license is needed so long as the work is personally performed by the
resident manager.
Chapter 6: Practice of real estate and disclosures 121
ANSWER KEY
1. a — Property ownership is not a requirement for obtaining a Department of Real Estate (DRE)
license.
2. a — Without the disclosure of the broker’s name and license number, this type of
advertisement is considered a prohibited “blind ad.”
3. d — An unlicensed assistant may be employed to perform nondiscretionary administrative
activities, such as write up documents including contracts and comparative market analyses
(CMAs), as long as they are reviewed by the broker. However, most interactions with the public
are not allowed.
4. d — The broker’s commission is earned when a ready, willing, and able buyer is found. Thus,
since the broker was licensed at the time he procured a buyer as contracted for, he is able to
collect his fee.
5. c — A real estate license needs to be renewed every four years by completing 45 hours of
continuing education.
6. d — Robert is the owner of the property being sold. Thus, the sale is considered a for sale by
owner (FSBO) transaction which does not require a license, as the private seller is acting for
their own account, not as an agent of another.
7. c — A licensee’s name and license number is required on all promotional materials, including
business cards. Further, a broker needs to have a physical address on record with the Department
of Real Estate (DRE) to receive mailings and be subject to state audits.
8. b — A salesperson is “an agent of the agent” and always works for the broker who represents
the principal. Thus, the commission is paid to the broker who then distributes the monies
according to the terms of the salesperson/broker agreement.
9. b — The Americans with Disabilities Act (ADA) protects against discriminatory conduct
against a person seeking employment.
10. c — Disclosure is key to most such questions. Provided everyone is made aware of the
promotion and its terms, this is a perfectly acceptable business practice.
11. c — Prohibiting the display of “For Sale” signs is a violation of the First Amendment freedom of
speech right and prohibits the free flow of truthful commercial information. A homeowners’
association (HOA) may impose reasonable rules about the posting of a For Sale sign, though
cannot prohibit it.
12. d — The lack of licensee identification creates the blind ad.
13. d — Any restraint of trade is a federal anti-trust violation.
14. a — Blockbusting, also known as panic selling, is the prohibited practice of inducing a
person to offer a dwelling for sale by creating fear over the changing demographics within the
neighborhood.
15. a — Creditors need protection from those who might attempt to walk away from their debt
obligations.
16. d — The certificate of clearance, issued by the State Board of Equalization (SBOE), assures
the buyer of a business opportunity that any taxes due have been paid.
17. b — Real estate brokerage is a profession. Therefore, any question about proper business
practice is controlled by the Business and Profession Code.
18. d — The Real Estate Commissioner issues a public report on all rural subdivisions containing
this sought after information.
19. c — On renewal of their license, failure to pay child support will cause a licensee to receive a
temporary license allowing 150 days to resolve the arrears.
122 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
20. d — The Rumsford Act applies to one-to-four unit residential properties as well as vacant
land designated for residential use.
21. d — Commingling is the mixing of client’s monies with those of other clients or the agent.
This is in contrast to conversion, which is the use of client funds by the agent or their office
for their own use.
22. b — No government agency or private trade organization establishes fees. A broker’s fee is set
between the broker and client.
23. d — The lack of disclosure between the broker and the buyer causes the broker to be the
responsible party. Therefore, the buyer may recover from both the seller and the broker. Further,
the seller may also recover from the broker since the broker was informed of the leaky roof by
the seller and did not disclose it to the buyer. In actual practice, the seller would have disclosed
the leaky roof in the Transfer Disclosure Statement (TDS).
24. b — Disclosure is the critical point in this question. There is nothing wrong with purchasing
the property, provided the broker makes full disclosure to the client and receives their consent.
25. a — A buyer of a condominium or property in a planned urban development (PUD) has the
right to receive copies of all the association and subdivision information and documents. A
homeowner warranty is an insurance policy that is purchased separately by the buyer.
26. a — This is the earthquake disclosure law.
27. d — A material fact is one that affects the value and desirability of a property. As such, the
failure to disclose is a significant breach of the broker’s fiduciary duty to their client. If the
failure to disclose rises to the level of fraud or deceit, the broker may be subject to civil or
criminal penalties depending on the nature of the misconduct.
28. d — Paying a portion of their commission to a buyer or seller in a transaction is allowable
provided full disclosure is made to all parties. Each of the other answer selections is against the
law.
29. b — A Natural Hazard Disclosure Statement (NHD) is required on all properties located
in the areas specified in answer selections a, c and d. Lead-based paint is not a natural hazard
and is provided on the sale of any residential property which was constructed pre-1978 using
a Lead-Based Paint Disclosure.
30. a — Earthquake fault zones are a quarter of a mile wide.
31. d — The theory of estoppel holds the act of making a down payment, occupying and improving
a property represents a mutual agreement to the sale.
32. d — Discrimination is almost always wrong as it is against public policy and in conflict with
Fair Housing laws. Senior citizen housing is one of the few exceptions.
33. c — The Department of Fair Employment and Housing is the state agency empowered to
enforce Fair Housing laws.
34. c — Discrimination can occur among any protected group. Here’s an example of a question
that can cause confusion simply by the structure of answer choice C. If the act is illegal (answer
choice D), then it cannot be legal regardless of being classified as ethical or not.
35. a — Franchise sales is an important part of business brokerage, such as fast food restaurants
and convenience stores.
36. c — A broker needs to pay into social security for an employee, but not for an independent
contractor.
37. c — Here’s an example of arriving at the correct answer by eliminating the wrong answers.
Though the other answer selections moderately relate to a property, the existence of cracks in a
hillside subdivision indicates there may be a problem with the soil under the property, which
is best diagnosed by a soil engineer.
Chapter 6: Practice of real estate and disclosures 123
38. d — The maximum security deposit for an unfurnished rental unit is two months’ rent while
the maximum for a furnished unit is three months’ rent. There is no specific dollar limit.
39. d — Leverage is the use of debt financing of an investment to maximize the return per dollar
of equity invested.
40. d — A license is a revocable right to use something, such as land. A license is appropriate
where the use of the land is open and notorious to avoid an adverse possession claim.
41. b — This is a real estate licensing question. Recognize the need to have a license for most any
activity involving a potential principal.
42. a — An applicant needs to apply for a license within one year of passing an examination.
43. c — “Puffing” refers to exaggerating certain components of a property. Think of a bird that
expands its chest to impress a potential mate.
44. d — This is a clear ethics violation. Kickbacks are never acceptable under any circumstance.
45. c — This is a licensing question. A broker’s license is required to assist property owners and
buyers.
46. c — An unlawful detainer (UD) action is the court procedure to force a tenant to vacate the
rental space they do not have the right to possess. A lessor (landlord) is the aggrieved person
who initiates this process against an individual who holds no right to occupy a property, such
as a holdover tenant.
47. b — Most laws and regulations are designed to protect the public. Preventing fraud may be
part of the goal, but the total reach of the Real Estate Law is far broader than that.
48. c — Record keeping commences from when the listing was signed or when the sale was
complete, i.e., the close of escrow.
49. a — “As is” is a nebulous and frequently misunderstood statement in real estate practice. A
Transfer Disclosure Statement (TDS) containing property information including known or
suspected property defects affecting value is required to be delivered to a prospective buyer on
the sale of a one-to-four unit residential property as soon as practicable on the commencement
of negotiations.
50. c — A red flag is something that alerts an agent of a previously unknown potential physical
problem with a property. The only answer selection that is consistent with this is an uneven
floor.
51. a — Many disclosure laws target one-to-four unit residential properties as a protected class
of real estate. As the Transfer Disclosure Statement (TDS) form is completed by a seller
regarding known facts, it is not required in the instance of a foreclosure. Further, commercial
property transactions require the disclosure of property defects affecting value, but the statutory
TDS form is not required.
52. c — This is the best answer choice. However, as a matter of best practice, the seller’s agent is
to explain to the seller their obligation to accurately complete their portion of the Transfer
Disclosure Statement (TDS).
53. b — Just as with a personal checkbook, a trust account needs to balance.
54. d — This is a terminology question. An interpleader action is a legal process asking the court
to resolve the dispute between the principals.
55. d — An employing broker is liable for any wrongful act conducted by their employee.
56. d — This question provides a good source of information about the activities that can be
performed by unlicensed assistants that can be used in future questions on this topic.
57. b — The abandonment of real property requires having no intent to continue meeting the
obligations of a lease or occupying the property.
124 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
58. c — Can you visualize exceptions that would make answer selections A and B incorrect? For
instance, some walkways may be narrower than five feet or made of asphalt. Answer choice D
cannot be correct, as the homeowners’ association (HOA) within a condominium community
is responsible for the maintenance of common areas and facilities. Thus, C is the best option as
public walkways always exist in a common area in an HOA community.
59. b — Due diligence is a positive effort to work for the client’s best interest. A conflict of interest
imposes a bias that makes it difficult to work solely for the client’s best interest.
60. b — A grace period lasts two years in which a licensee by process of a late-renewal may
reinstate their license.
61. b — This question is phrased in the negative. Answer selections A, C and D render the rental
property uninhabitable. The electrical wiring (a significantly longer answer and more detailed
answer selection), does not trigger the inhabitable defense since it is safe and functional even
though it does not meet current building codes.
62. b — The statutory Transfer Disclosure Statement (TDS) only comments on conditions
within the property itself. However, criminal activity occurring near the property is a
material fact which must be separately disclosed.
63. b — Due to the fact the tenant moved in and began paying rent, these activities signifying
periodic tenancy take precedence over the verbal lease agreement.
64. c — Standard rental agreements contain a covenant obligating the lessor (landlord) to allow
a tenant to live free of harassment and benefit from the quiet enjoyment of their property.
65. a — The key word in the question is “earned.” When the buyer who is ready, willing, and able
has been found, the commission is earned. Another question might ask “when” the commission
is generally received, which is the close of escrow.
66. c — This is the only the answer selection which meets all the requirements set forth in the
question. Options and contracts both obligate the seller and stipulate an agreed to price. A
right of first refusal is a pre-emptive right to buy a property if the owner decides to sell.
67. a — This is a Fair Housing question. Envision a sales agent “steering” the potential buyer away
from neighborhoods the buyer might wish to see.
68. b — A sublease is less than a complete transfer of a leasehold interest subject to the terms of
the master lease. The original lessee retains certain obligations and acts in a capacity similar to
the lessor in relation to the sublessee.
69. c — When the tenant relinquishes possession by mutual agreement with the owner, it is
referred to as surrender. Alternatively, if the tenant relinquishes possession with no intent of
returning and without the agreement of the owner, it is called abandonment.
70. b — Only trade fixtures belong to the tenant as personal property and are to be removed by
the tenant on the termination of the lease.
71. d — All of the listed activities are violations which are subject to disciplinary action.
72. c — Gender is among the protected groups described in the Civil Rights Act of 1968.
73. a — The Unruh Act is California specific. The Civil Rights Act of 1964 is in reference to voting
rights legislation. Thus, the correct answer is A. Civil Rights Act of 1968. Notice the Civil Rights
Act of 1968 is addressed in several other questions, which may be helpful when answering this
question.
74. b — A resident manager who performs, orders, or oversees maintenance or repair projects
costing $500 or more are subject to contractor licensing requirements issued by the California
Department of Consumer Affairs Contractors State Licensing Board (CSLB).
Chapter 7: Contracts 125
Chapter 7: Contracts
Key Concepts
Critical real estate concepts equaling approximately 12% of the state licensing exam.
• General • Agreements
• Listing agreements • Promissory notes/securities
• Buyer-broker agreements • Purchase/lease options
• Offers/purchase contracts • Advanced fees
Key Terms
Fundamental real estate vocabulary likely to appear on the state exam with reference to the
quiz questions illustrating its application. See the Real estate glossary on page 331 for the full
definitions.
acknowledgment (q. 55) exclusive right-to-sell listing purchase agreement (q. 44, 45)
bi-lateral contract (q. 10, 26) (q. 9, 31) qualified endorsement (q. 13)
breach (q. 2) fraud (q. 56) rejection (q. 8)
business opportunity hold harmless clause (q. 32) rescission (q. 47)
listing (q. 54) land contract (q. 17 – 21) revocation (q. 35, 43, 48)
capable parties (q. 15) lease (q. 57) specific performance (q. 49)
coercion (q. 4) liquidated damages (q. 22, 42) Statute of Frauds (q. 1, 50)
consideration (q. 11) listing (q. 23, 25, 28, 29) tender (q. 51)
counteroffer (q. 12) loan assumption (q. 37) termination (q. 8, 36)
duress (q. 4) mutual consent (q. 5) time-essence provision (q. 46)
enforceable contract (q. 14) net listing (q. 33) unenforceable (q. 7, 52)
essential elements of a novation (q. 38) void (q. 40)
contract (q. 3, 6, 30) open listing (q. 27, 34) voidable contract (q. 4)
exchange (q. 16) option listing (q. 41)
exclusive agency listing (q. 24) option to buy (q. 39, 53)
126 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Note: This section is designed to give you a broad understanding of the basic principles which
relate to the subject matter of this chapter. However, it is not exhaustive. For further reading on
this concept, see your Real Estate Principles and Legal Aspects licensing course materials.
For example, a broker employed under an open listing is not obligated to use diligence in their
efforts to locate a buyer. The broker only has a best-effort obligation since the broker does not “accept”
the employment until they locate a buyer interested in the property. Thus, an open listing is legally
classified as a unilateral contract, as is an option contract.
A bilateral contract is a contract in which a promise by one party is given in exchange for a promise
made by the other party. It is a promise given in exchange for a promise, both parties being required
to perform.
For example, when representing a seller under a written exclusive listing, the broker (and their
licensees) has entered into a bilateral employment agreement. Such an employment obligates
the broker to exercise due diligence by way of a constant and continuing search to locate ready and
willing buyers, while keeping the seller informed of their progress.
An executed contract is a contract in which both of the parties have performed the duties they
agreed to. Alternatively, an executory contract is a contract in which some activity remains to be
performed by one or both of the parties to the transaction.
A valid contract is binding and enforceable against the parties. There are four essential elements
of a valid contract:
• capable parties;
• mutual consent;
• legal object; and
• consideration.
To be capable, the parties need to:
• be of sound mind;
• possess their civil rights; and
• be at least 18 years of age.
Mutual consent in real estate contracts is formed in three steps:
• the first party makes an offer to the second party, such as a buyer offering to purchase a seller’s
property;
• the second party accepts the offer without qualification; and
• the second party communicates their acceptance to the first party.
Chapter 7: Contracts 127
However, if the original offer is accepted by the second party but on different terms, the second party’s
response becomes a counteroffer submitted from the second party to the first.
Both the form of consideration and the purpose of a contract are required to be lawful in order for the
contract to be valid.
Further, under the state Statute of Frauds law, certain contracts need to be in writing and signed
before they are legally enforceable, including:
• a contract with the intent to convey, transfer or sell real estate;
• a listing agreement employing a broker to sell a property, regardless of the length of the listing;
• any contract that will be performed greater than a year after it is entered into;
• any lease with a term exceeding one year; and
• an agreement to repay the debt of another.
Void and voidable are contract terms which are similar but are distinguishable by the date they
affect the validity of a contract, and thus, the rights of those who relied on the contract.
Listing agreements
A listing agreement is a written employment contract between a client and a licensed real estate
broker. On entering into a listing agreement, the broker is retained and authorized to perform real
estate related services on behalf of the client in exchange for a fee.
The client retaining a broker may hold an ownership interest in real estate, which the client seeks to
sell, lease or encumber as collateral for trust deed financing.
The person employed by a client to provide real estate services in expectation of compensation will
always be a licensed real estate broker. Likewise, if a dispute arises with a client over the client’s
failure to pay a fee, only the broker employed by a written listing agreement signed by the client
may pursue collection.
128 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
A real estate licensee employed by the broker may have obtained the listing, but the licensee did so
acting on behalf of the broker. The licensee has no independent right to enforce the listing agreement.
The relationship created between the client and the broker and properly documented by a written
listing agreement has two distinct legal aspects:
• an employment relationship; and
• an agency relationship.
The employment relationship established on entering into a listing agreement specifies the scope
of activities the broker is to undertake in the employment and authorizes the broker to carry them
out by contract.
On the other hand, the agency relationship is imposed on the broker by law as arising out of the
representation authorized by the employment. Agency carries with it the fiduciary duties of
loyalty and full disclosure owed by the licensee to the client.
A variety of listing agreements exist, each employing and authorizing a broker to perform real estate
related services under different conditions. The variations usually relate to the:
• extent of the broker’s representation;
• type of services to be performed by the broker; and
• events which trigger payment of a fee.
Most listing agreements are for the sale or purchase of single family residential (SFR) property
intended to be occupied by the buyer. Others are for residential and commercial income-producing
properties, such as industrial, motel/hotel, retail stores, office, farm or unimproved properties.
Despite the application of various agreements to the type of property described in the listing, all
listings fall into one of two general categories:
• exclusive (an example of a bilateral contract); or
• open (an example of an unilateral contract).
Under an exclusive listing, a broker receives the sole right to represent:
• an owner by marketing the listed property for sale or lease and locating a buyer or tenant;
• a buyer or tenant by locating property; or
• the borrower to obtain mortgage financing.
Two types of exclusive employment agreements for buying and selling real estate exist:
• an exclusive agency agreement for a seller or buyer; and
• an exclusive right-to-sell or right-to-buy listing agreement.
Both types of exclusive listings establish the broker and their agents as the sole licensed real estate
representatives of the client. However, they are distinguished by whether or not the broker has any
right to a fee when the property is sold or located solely by the efforts of the client.
Under an exclusive agency agreement’s fee provision, the broker does not earn a fee when the client,
acting independently of the client’s broker and any other broker, accomplishes the objective of the
employment, i.e., selling the listed property or locating and buying the property sought.
Chapter 7: Contracts 129
Conversely, during the listing period under an exclusive right-to-sell/buy agreement’s fee provision,
the broker earns a fee no matter who produces the buyer or locates the property sought, be it the
client, another broker or other representative of the client, or the client’s broker.
Similarly, an option listing is a variation of the exclusive right-to-sell listing. Its unique feature is
the additional element of a grant to the broker of an option to buy the property at a predetermined
price, if the property does not sell during the listing period.
An open listing, sometimes called a nonexclusive listing, does not grant exclusive rights to the
broker and their agents to be the sole representative of the seller. Also, the client may enter into open
listings with as many brokers as they choose to without becoming obligated to pay more than one
fee.
A brokerage fee under an open listing to sell real estate is due a broker only if the broker procures
a ready, willing and able buyer and presents the owner with a full price offer from the buyer to
purchase the listed property.
The terms contained in the offer submitted by the broker will be substantially the same as the terms
sought by the owner under the listing to earn a fee whether or not the seller accepts it. If other terms
are offered by a buyer and accepted by the owner, the broker will still earn their fee.
For a broker to be entitled to a fee under an open listing, the licensee needs to present the offer to the
owner before the property is sold to some other buyer located by another broker or the owner. Also,
the offer needs to be submitted before the listing expires or is revoked by withdrawal of the property
from sale or by the termination of the agency.
Further, a net listing is used only with sellers and can be structured as either an open or an exclusive
type of listing. The net listing is distinguishable from all other listing arrangements due to the way
compensation is calculated.
In a net listing, the broker’s fee is not based on a percentage of the selling price. Instead, the seller’s
net sales price (excluding brokerage fees and closing costs) the seller is to receive on closing is stated
in the listing agreement. The broker’s fee equals whatever amount the buyer pays in excess of the
seller’s net figure and closing costs.
Buyer-broker agreements
An exclusive right-to-buy listing agreement is used by brokers and their agents to prepare and
submit to prospective buyers their offer to render services on their behalf as the buyer’s real estate
agent. Under it, agents are employed to locate property sought by the buyer in exchange for the
buyer’s assurance they will pay a fee to the agent when the buyer acquires the type of property they
seek.
When entering into an exclusive right-to-buy agreement, the buyer’s broker and their agents agree
to undertake the task to diligently locate, gather and disclose information and data for available
properties on the buyer’s behalf.
The buyer, who has until now been treated as a customer, now becomes a client. As a client, the
buyer authorizes the agent to act on their behalf to locate and look into properties known to be on
the market but unlisted or listed with other brokers.
130 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Offers/Purchase contracts/Agreements
For real estate sales to convey ownership of a property, the primary document used to negotiate the
transaction between a buyer and seller is the purchase agreement (PA), also known as a deposit
receipt. Numerous California publishers produce purchase agreement forms, all of which are legal
for use in California.
A letter of intent is a non-binding proposal signed and submitted to a property owner to begin
negotiations.
A real estate investment trust (REIT) is a corporate security traded on the stock market as a conduit
for making investments in income-producing real estate, trust deeds and government securities.
REITs are the point at which the stock market and the real estate market collide, and are one way for
individuals to invest in income property, without purchasing and operating the property themselves.
Purchase/lease options
An option to purchase a property from a seller imposes no obligation on the buyer to open
escrow and purchase the property. Conversely, the option contains the seller’s irrevocable offer that
obligates the seller to sell the property on the terms stated in the option agreement if the buyer
decides to buy the property within a set period of time, called the option period.
Thus, the option agreement allows the buyer to control the property without committing themselves
to purchase it until they exercise the option, if ever.
When the buyer exercises the option, a bilateral sales contract is automatically formed, no differently
than had they accepted an offer from the seller to sell the property under a purchase agreement
containing nearly identical terms. Thus, on exercise, both parties become obligated to perform as
agreed and must proceed with closing the sale since no contingencies exist.
In an option agreement, the owner/seller is referred to as the optionor and the potential buyer is
referred to as the optionee. [See Chapter 8]
The other significant use of an option to buy relates to residential and commercial leasing
arrangements. A purchase option may be structured as a stand-alone contract or incorporated into
a lease. In this context, a purchase option offers a prospective tenant the ability to later acquire
ownership of the property they will be occupying.
A lease with an option to purchase is distinguished from the purchase rights held by a tenant under
a right of first refusal agreement.
Unless the seller is given something in exchange for the right, the option fails for lack of consideration.
While consideration is needed to create an option agreement which is binding on the seller or
landlord, the amount of the consideration paid for an option may be a minimal amount. Further,
while consideration is necessary for a purchase option to be enforceable, a method for payment of
the purchase price or a closing date are not.
Thus, the option, like all contracts, needs to have the four essential elements to be enforceable.
Unless a particular manner for exercising the option is specified in the option agreement, any
communication from a buyer to a seller of their intention to exercise the option is sufficient.
132 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Advanced fee
Broker fees deposited with the broker before they are earned are called advance fees. Advance fees
will be deposited in the broker’s trust account. The funds belong to the client of the broker, not the
broker, and may not be withdrawn by the broker before they are earned and a statement is sent to
the client.
In addition to trust fund accounting requirements, a broker needs to send the client a verified
accounting for the advance fees:
• no later than the end of each calendar quarter, and
• at the time the contract between the broker and client is fully performed.
Before a broker may solicit, advertise for and agree to receive an advance fee, the advance fee
agreement and materials are to be submitted to the Commissioner of the Department of Real
Estate (DRE) for approval at least 10 calendar days prior to use.
If the Commissioner, within 10 calendar days of receipt, determines the material might mislead
clients, the Commissioner may order the broker to refrain from using the material.
To be approved by the Commissioner, the advance fee agreement and any materials to be used with
the agreement will:
• contain the total amount of the advance fee and the event triggering the fee or the date the fees
will become due and payable;
• list a specific and complete description of the services to be rendered to earn the advance fee;
• give a definite date for full performance of the services described in the advance fee agreement;
and
• contain no false, misleading or deceptive representations.
Exam Jargon
Specialized real estate terminology related to contracts. See the Real estate glossary on page
331 for the full definitions.
addendum boot mediation
arbitration habendum wild document
Chapter 7: Contracts 133
SAMPLE QUESTIONS
1. Which of the following contracts needs to be in writing in accordance with the Statute of
Frauds?
a. A lease for one year.
b. The sale of growing crops.
c. A contract that is not to be performed for thirteen months.
d. A contract that is to be performed within one year.
2. Failure to perform as agreed under a contract is known as a(n):
a. novation. c. breach.
b. illegal act. d. damages.
3. The essential elements of an enforceable contract are:
a. express, consideration, mutuality, lawful object.
b. mutuality, written, competent parties, lawful object.
c. communicated, written, competent parties, lawful object.
d. competency, mutual consent, lawful object, consideration.
4. If one party in a contract is coerced or placed under duress by the other party, the contract is
at the discretion of the injured party.
a. void c. illegal
b. voidable d. unenforceable
5. Mutual consent is typically evidenced by:
a. offer and acceptance. c. duress.
b. fraud. d. agreement over some contingencies.
6. All of the following are essential elements of a contract, except:
a. an offer. c. consideration.
b. acceptance. d. performance.
7. Which of the following is true?
a. An illegal contract can be an enforceable contract.
b. A valid contract can be an unenforceable contract.
c. A void contract can be enforced by one party only.
d. “Voidable” means “void unless validated.”
8. An offer is terminated by:
a. rejection by the offeror. c. revocation by the offeree.
b. rejection by the offeree. d. a request for an extension by the offeree.
9. On an exclusive listing, a broker can be disciplined for failure to do all of the following, except:
a. attach a tax statement to the listing.
b. give a copy of the listing agreement to the seller.
c. include a definite termination date.
d. represent the best interests of their client.
134 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
10. A listing agreement in which a seller agrees to pay a broker a commission if they produce
a “ready, willing, and able” buyer and agree to use due diligence in procuring a buyer is an
example of a(n):
a. bilateral executory contract. c. unilateral executed contract.
b. unilateral executory contract. d. bilateral executed contract.
11. In a contract, the terms “adequate, valuable, good or sufficient” refer to:
a. capital. c. character.
b. consideration. d. compensation.
12. Seller Vega listed a vacant lot with Broker Wright for $120,000. Prospective buyer Marty
submitted an offer at a purchase price of $100,000 with the offer to expire in 30 days. The next
day, Seller Vega countered at $110,000. Buyer Marty rejected the counter. Three days later,
Seller Vega delivered to Broker Wright a signed acceptance of Buyer Marty’s initial $100,000
purchase offer. When Broker Wright told Buyer Marty of Seller Vega’s acceptance, Marty stated
he did not intend to buy the property. Based on the foregoing actions:
a. there is no contract.
b. the contract is unenforceable.
c. a unilateral contract has been made.
d. the buyer must submit a counteroffer.
13. Writing “without recourse” on the back of a check creates a(n):
a. qualified endorsement. c. restrictive endorsement.
b. blank endorsement. d. open endorsement.
14. All of the following contracts do not need to be in writing in order to be enforceable, except:
a. An agreement by a buyer to assume an existing loan secured by a deed of trust.
b. An agreement which is not to be performed within one year of being entered into.
c. A listing to lease real property for one year.
d. Both a. and b.
15. All of the following persons may not lawfully enter into a valid contract to purchase property,
except:
a. unemancipated minors. c. convicts.
b. minors who are wards of the court. d. international buyers.
16. A(n) is an example of a bilateral contract in which both the offeror and the offeree
are grantors.
a. land contract c. open listing
b. exchange agreement d. mortgage
17. A real estate transaction in which the buyer gains possession of a property while the seller
retains legal title until the debt is fully repaid is an example of a(n):
a. mortgage. c. land sales contract.
b. trust deed. d. sublease.
18. The right of possession and equitable title is held by the:
a. vendee. c. trustee.
b. vendor. d. trustor.
Chapter 7: Contracts 135
19. Under a land sales contract for the sale of real property, legal title is held by the:
a. trustor. c. vendee.
b. beneficiary. d. vendor.
20. Upon the default of a buyer under a land sales contract, the seller:
a. instructs the trustee to initiate foreclosure.
b. requests a deficiency judgment against the buyer through the courts.
c. files a quiet title action.
d. files a lis pendens action.
21. In order to qualify for recording with the County Recorder, a land sales contract needs to:
a. have a policy of title insurance issued.
b. contain a granting clause.
c. include a bill of sale.
d. be signed by both the buyer and seller and be acknowledged before a notary public.
22. Liquidated damages cannot exceed ______________ in the instance of an owner-occupied one-
to-four unit residential property:
a. sales price c. 3% of the sale price
b. actual costs d. the buyer’s cash down payment
23. The typical listing contract authorizes a broker to:
a. find a purchaser and obligate their principal to a contract to sell.
b. find a purchaser and accept a deposit with an offer to purchase.
c. guarantee a third party that an offer meeting the terms of the listing will be accepted by
their principal.
d. transfer the real property that is the subject of the listing.
24. All of the following statements are incorrect, except:
a. Brokerage commissions are limited by law.
b. Under an exclusive agency listing, the seller may not liable for a commission if they sell
the property themselves.
c. A finder may only take part in transaction negotiations when employed by a broker
under a written employment agreement.
d. A broker may never collect a commission if a sale is consummated after a listing has
expired.
25. A salesperson obtains a listing on a family member’s house. After taking the listing, the
salesperson changes brokers. The listing:
a. belongs to the salesperson’s previous broker.
b. belongs to the salesperson.
c. belongs to the multiple listing service (MLS).
d. is terminated by the change of employing broker.
26. A listing agreement can be described as:
a. a promise for a promise. c. an executory contract.
b. a bilateral contract. d. All of the above.
136 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
27. When a broker has a nonexclusive listing, to be legally entitled to a commission, they need to
be able to prove they:
a. timely provided a conflict of interest disclosure to the buyer.
b. somehow contributed to ultimate sale of the property.
c. they were the procuring cause of the sale.
d. aggressively marketed the property.
28. The authority of the broker to accept a good faith deposit from a buyer is provided for in the:
a. deposit receipt. c. listing agreement.
b. escrow instructions. d. lease agreement.
29. The most essential element of an enforceable listing contract is that it provides:
a. written authority for the broker to accept a deposit.
b. an offer to purchase property by a ready, willing and able buyer.
c. a written contract documenting the broker’s employment.
d. a mutual agreement concerning the broker’s commission.
30. A listing agreement needs to comply with all the legal requirements for a valid contract,
including:
a. offer and acceptance.
b. the full performance of an unlawful purpose.
c. the guarantee of an unspecified consideration.
d. acknowledgment and recording.
31. Under which one of the following listing contracts must an owner pay a commission, regardless
of who sells the property?
a. An exclusive agency listing. c. A net listing.
b. An exclusive right to sell listing. d. An open listing.
32. The hold harmless clause in a listing agreement protects the agent from liability for:
a. any type of lawsuit.
b. misrepresentations by the agent to third parties.
c. misinformation about the property from the seller.
d. damages resulting from the buyer misrepresenting their loan qualifications.
33. Under a(n) , the agent’s fee is set as all sums received exceeding a net price
established by the owner.
a. open listing c. net listing
b. cancelled listing d. exclusive agency listing
34. Brokers Phoebe and Saul both have an open listing on a property. Broker Phoebe showed the
property to a prospective buyer, but the buyer decided not to buy. Two weeks later, Broker Saul
contacted the same buyer and arranged a sale of the property. The seller is obligated to pay a
commission as follows:
a. the full amount to Saul. c. fifty percent to each broker.
b. the full amount to Phoebe. d. to be negotiated.
Chapter 7: Contracts 137
35. Broker Matthews took a 90-day exclusive agency listing to sell a property owned by Tyler. After
30 days without selling the property, Tyler sent Broker Matthews a letter cancelling the listing.
One week later, Tyler enters into open listings with several other brokers. Two weeks later, one
of the brokers sold the property. In this situation, Tyler:
a. did not have the right to give open listings to the other brokers.
b. had a right to relist the property and had the right to cancel Matthew’s listing.
c. owes the commission only to the broker who procured a buyer.
d. is liable for payment of a commission to Matthews as well as to the selling broker.
36. Which of the following is an acceptable termination date for an enforceable exclusive listing
of residential real property?
a. 30 days from completion of construction of the property.
b. 3 days after the service of notice of rescission by either the seller or the listing agent.
c. 60 days after receipt of a conditional loan commitment.
d. 180 days after the listing agreement is signed.
37. When Jack sells his home, he wants to be relieved of the primary liability for payment of the
existing loan. He needs to find a buyer who is willing to:
a. take the property subject to the existing loan.
b. assume the existing loan.
c. execute a land contract.
d. make a large down payment.
38. When an existing contract is replaced by an entirely new contract, it is an example of:
a. assignment. c. novation.
b. rescission. d. reconstruction.
39. All of the following are false concerning an option, except:
a. A fiduciary duty exists between the optionor and the optionee.
b. Only the optionor is bound to perform under the terms of an option.
c. Consideration does not actually have to change hands so long as the option says it has.
d. The optionee has created a legal interest in the property.
40. A contract based on an unlawful purpose is:
a. void. c. unenforceable.
b. voidable. d. enforceable, if in writing.
41. Broker Greg took a listing on a commercial office complex and received an option to purchase
the property within one month. On the 25th day of the listing, Broker Greg decides to buy the
property. Before buying the property, Broker Greg is required to:
a. disclose the existence of any outstanding offers received on the property to the seller.
b. disclose all material information to the seller.
c. obtain written consent from the seller which acknowledges any profit or anticipated
profit.
d. All of the above.
138 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
42. A buyer and seller initial the liquidated damages clause in a real estate purchase agreement.
The buyer later defaults. The amount recoverable is:
a. given to the seller when escrow opens.
b. limited to 3% of the selling price.
c. given to the seller after the default.
d. used to pay any costs incurred by the seller and then returned to the buyer.
43. Heather made an offer to purchase real property. The seller accepted the offer but Heather died
before this acceptance was communicated to her by the seller’s agent. Based on these facts,
which of the following is true?
a. Notification of the seller’s acceptance to the administrator or executor of Heather’s
estate compels her estate to perform and close escrow.
b. The death of Heather constitutes a revocation of the offer.
c. The offer and acceptance constitute an enforceable contract, even if Heather was not
aware of the acceptance.
d. The accepted offer is binding on the administrator’s estate since the deed was not
delivered before Heather’s death.
44. A broker receives an offer from a buyer. The deposit is in the form of a personal promissory note
for $20,000 payable to the seller in 60 days, plus 10% interest. Which of the following is true?
a. The broker cannot accept a note as a deposit.
b. The broker needs to present the offer and not mention the form of deposit to the seller.
c. The broker needs to accept the promissory note but must notify the seller the deposit is
in the form of a promissory note.
d. Any deposit for the purchase of real property needs to be in the form of cash or a certified
check.
45. When does a broker not have to present an offer to purchase real property to their principal?
a. When all the contingencies have not been removed.
b. If the offer is for a commercial property.
c. When the offer is patently frivolous or the broker is acting on written instructions of the
principal.
d. When the broker has disclosed to the seller in writing why they did not present the
offer.
46. The instrument most likely to state that “time is of the essence” is a(n):
a. exclusive authorization and right to sell. c. open listing.
b. real estate purchase contract. d. option.
47. A real estate buyer can rescind an offer until:
a. the seller has agreed to an appointment.
b. the offer has been presented to the seller.
c. the seller has accepted the offer.
d. the seller’s acceptance has been communicated to the buyer.
Chapter 7: Contracts 139
48. Anita signs a real estate purchase contract as a buyer. The contract states the offer to purchase
is valid for three days. One day later, Anita wishes to rescind her unaccepted offer. Which of
these answers is correct?
a. Anita may revoke her offer, but is responsible for her agent’s commission.
b. Anita is bound to perform since the offer is irrevocable for three days.
c. Anita may revoke the offer and recover her deposit.
d. Anita may revoke the offer but will lose her deposit.
49. All of the following may request specific performance when damages resulting from a breach
of the contract are not adequate, except the:
a. purchaser. c. attorney-in-fact for one of the principals.
b. broker. d. seller of a parcel of land.
50. Under a land sales contract, title is conveyed to a buyer when they pay the
remaining unpaid amount on the purchase price.
a. one-fourth c. three-fourths
b. one-half d. all
51. An offer to perform in accordance with contractual obligations is an example of:
a. a conditional offer. c. tender.
b. a covenant. d. performance.
52. A husband signed a contract to sell community real estate without his wife’s signature. The
contract is:
a. voidable. c. unenforceable.
b. binding. d. void.
53. Which of the following is true concerning an option?
a. No consideration is necessary to create an option.
b. An option is void if the consideration is inadequate.
c. An option is valid so long as consideration is actually delivered.
d. None of the above.
54. To be enforceable, the listing of a business opportunity:
a. needs to be in writing. c. does not always have to be in writing.
b. never has to be in writing. d. needs to be exclusive.
55. Acknowledgment by a notary public of the signature on a deed is done as a prerequisite for:
a. recording the deed at the county recorder’s office.
b. providing constructive notice of the grantee’s rights in the property.
c. proving the validity of the deed.
d. avoiding forgeries.
56. Any intentional concealment of material facts by an agent is regarded as:
a. misrepresentation. c. collusion.
b. fraud. d. commingling.
57. The terms “index,” “triple net” and “flat” are used to describe:
a. linkages. c. rural land use.
b. leases. d. freehold estates.
140 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
ANSWER KEY
1. c — The Statute of Frauds, based on an old English statute, requires written contracts for
actions not to be performed within one year.
2. c — The failure to perform under a contract is known as a breach. The concept of answer
selection A. novation is referenced in another question in this section.
3. d — Another question in this section on the Statute of Frauds shows that not all contracts need
to be in writing, eliminating both answer choices B and C.
4. b — The party that suffers from duress has the right to cancel the contract. Therefore, the
contract is voidable by the injured party only.
5. a — Mutual consent implies both parties have agreed to the contract. Thus, one party has
made an offer and the other has accepted.
6. d — Performance is not essential to form a valid contract. Performance may be required to
complete the activity called for in a contract after it has been signed (offer and acceptance), but
is not necessary to the formation of a contract.
7. b — An oral contract for more than a year may be valid but unenforceable.
8. b — This requires knowing who is who in the question. The offeror is the person who made the
offer. The offeree is the person who may accept or reject an offer.
9. a — An exclusive listing requires a definite termination date. Further, copies of all documents
that are signed need to be given to the person who signed them. A tax statement does not need
to be attached to the listing.
10. a — Bilateral refers to a promise to perform made by one party in exchange for a promise to
perform made by another party. Executory means the promised activities will be performed
by both parties in the future.
11. b — Consideration is something of value provided to both participants to a contract which
induces them to perform. Another question in this section is premised on this topic. Get in the
habit of recognizing when a question or answer choice offers information on another question.
12. a — When a counteroffer is made, no matter what the reason may be, the original offer is
voided.
13. a — “Qualified” suggests the endorser meant to set certain restrictions on the check. In this
instance, if the check is not honored, the endorser is not liable.
14. d — This is very similar to another question in this section on the Statute of Frauds. A slight
derivation on another question will likely exist on the state exam.
15. d — Foreign buyers may lawfully enter into a valid contract to purchase property.
16. b — This question requires you to identify a bilateral contract in which both parties may be in
both positions. Only an exchange agreement provides this opportunity.
17. c — Neither trust deeds nor mortgages transfer possession without concurrently transferring
legal title.
18. a — The reference to “equitable title” indicates this question is framed in the context of a land
sales contract in which the participants are the vendor (seller) and the vendee (buyer). In
most cases, the party name ending in “or” owns the real estate. The “ee” (vendee) is the buyer
and therefore has possession and equitable title of a property, but not legal title.
19. d — This is the reverse of a question in this section on the right of possession and equitable
title. Again, the vendor (seller) holds legal title to the property until the debt is repaid in full.
Chapter 7: Contracts 141
20. c — In the instance of a land contract, also known as a contract sale, there is no trustee. Further,
the vendor already has legal title to the property so answer selection D would impact them
(the seller) rather than the vendee (the buyer). Thus, on a default by the buyer, the seller files a
quiet title action.
21. d — Unlike a transfer by grant deed, a land sales contract needs to be signed by both parties.
The signatures require acknowledgment before a notary public to be recorded.
22. c — Liquidated damages are limited to 3% of the sales price on an owner-occupied one-to-
four unit residential property (a protected property).
23. b — Each of the wrong answers can be seen as incorrect. An agent cannot obligate the seller to
accept an offer nor can they transfer property owned by the seller.
24. b — Under an exclusive agency listing, the broker is guaranteed a commission if the property
is sold by anyone, unless the seller is excepted in the listing agreement. Though less common,
this may occur when a FSBO seller later enters into exclusive agency with a buyer’s agent,
but personally sells the property to a buyer obtained from their efforts when the property was
sold as a FSBO.
25. a — The broker is the agent to the principal and the salesperson is an agent of the broker. The
listing was generated under the prior broker’s license and thus stays with that broker.
26. d — All of the answer selections are correct.
27. c — To collect a commission, the broker needs to locate a buyer who is ready, willing and able
to buy, and they must prove they were the procuring cause of the sale.
28. c — Another question in this section also covers broker authorization. The authorization is
contained in the listing (employment) contract.
29. c — The critical element to recognize in this question is that a listing contract is an employment
contract.
30. a — Answer choice A is the only acceptable answer. You cannot guarantee or perform illegal
acts. Listings are not recorded, nor do they require acknowledged signatures.
31. b — An exclusive right to sell listing agreement guarantees a commission will be paid to the
broker regardless who sells it.
32. c — This clause is in the listing contract between the seller and the broker, for the broker to be
“held harmless.” Logically, it is protection against actions by the other party to the contract.
33. c — The answer is in the question. A net listing gives an established amount to the seller and
all the excess to the broker.
34. a — An open listing guarantees the entire commission to the procuring broker (Saul in this
example).
35. d — The open listing guaranteed payment to the procuring broker. The exclusive listing is a
bilateral contract which cannot be voided unilaterally. Therefore, the seller owes a commission
to both brokers.
36. d — An exclusive listing requires a specific termination date. This is generally based on the
date the listing contract is signed.
37. b — The buyer’s assumption of the loan is the only answer selection offered that will relieve
the seller of the primary responsibility for the underlying debt. Though the obvious answer
would be for the seller to pay off the loan, that answer selection is not provided and therefore
cannot be selected.
142 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
38. c — This question illustrates the need to be familiar with real estate terminology. Under a
novation, there is a substitution or exchange of a new obligation or contract for an old one by
the mutual agreement of the parties. Refer to the Real estate glossary at the back of this book for
definitions to critical real estate terms you are likely to encounter on the state exam.
39. b — The optionor is the owner of the real estate. Thus, the optionor is the only party obligated
to perform under the terms of the option.
40. a — Any contract to perform an illegal act is void by definition. This is one of the four essential
conditions of a contract.
41. d — This is an example of full disclosure. All of these conditions need to be met in order for
the broker to correctly exercise their option to purchase the property.
42. c — The amount recoverable under a liquidated damages provision in a purchase
agreement is not always limited to 3%, only for one-to-four unit residential property. The only
answer that is true is C.
43. b — Had the buyer’s death occurred after communication of the acceptance of the offer by the
seller’s agent, her estate would have been responsible to complete the escrow.
44. c — A deposit for the purchase of property may be made in any form. However, the broker
needs to disclose the form and amount of the deposit to the seller.
45. c — While this is the correct answer, as a matter of prudent practice, an agent is to disclose the
existence of all offers to the seller, unless the seller explicitly instructs otherwise.
46. b — The purchase agreement is the only contract offered that would require a response from
the opposing party within a stated period of time. This is a good example of a question in which
the wrong answers may be eliminated, thus leaving only the correct one remaining.
47. d — It is the communication of the acceptance of the offer to the buyer that limits their ability
to rescind the offer.
48. c — Until the offer has been accepted, and the acceptance has been communicated to the
buyer, Anita is free to revoke the offer.
49. b — The parties to an escrow do not include the broker. Thus, the damages described do
not include the broker’s fee nor would the broker have any authority to demand specific
performance.
50. d — Like most contracts, such as the purchase of an automobile, title is not conveyed until the
final payment has been made.
51. c — To make an offer is to “tender” the offer. Refer to the Real Estate Glossary if any of these
terms are unknown.
52. c — Both owners of community property need to be involved in the sale of property held
by both parties.
53. c — The amount of consideration is not relevant. However, the consideration itself needs to be
delivered to create a valid and enforceable option.
54. c — Be wary of “never” and “always” in questions such as this. In this case, a business
opportunity sale may include real estate which requires the listing to be in writing. Recognize
that an open listing is not exclusive and yet is still valid and enforceable.
55. a — Recording requires a notary acknowledgment verifying the identity of the signors.
Even if a deed is valid, it cannot be recorded without acknowledgment.
56. b — Intentional concealment is the key to the question. This is the condition required to
evidence fraud beyond mere misrepresentation.
57. b — All of these terms relate to leases as they describe how rent is to be calculated and charged.
Chapter 8: Real estate participants 143
Broker: The holder of a broker license issued by the Department of Real Estate (DRE). A broker acts
as an agent to a principal buyer or seller. A real estate broker has supervisory responsibility over the
sales people they employ under their license.
Designated officer: The licensed broker qualifying a corporation for a corporate broker license.
Finder: An unlicensed individual who solicits, identifies and refers potential clients to brokers or
agents in exchange for the promise of a fee.
Licensee: The holder of a salesperson or broker license issued by the Department of Real Estate (DRE).
Leasing agent: A broker employed by a landlord or rental property owner to market available space
to rent, locate suitable tenants and negotiate lease terms.
Office manager: A licensee hired by a broker to fulfill the supervisory responsibility of reviewing
documents and maintaining office files.
Subagent: An individual who has been delegated agency duties by another agent of the client, but
not the client themselves.
Unlicensed assistant: A non-licensee who fulfills a clerical role for a real estate office. An unlicensed
assistant may not discuss price and terms with potential and current clients.
144 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
LENDING
Mortgage broker/Banker: One whose principal business is the originating, arranging, closing,
selling and servicing of loans secured by real estate.
Mortgagee/Lender/Creditor: An entity or person that lends mortgage money to a borrower for the
purpose of purchasing real property.
Mortgagor/Borrower: A person or entity that borrows money to purchase a piece of real property.
TRUST DEED/NOTE
Beneficiary: The holder of a note secured by a trust deed and entitled to the performance of the
provisions in the trust deed, such as a lender or carryback seller. The performance is generally the
repayment of debt evidenced by a note.
Trustee/Neutral party: A party to a mortgage who holds property in trust as security for the
performance of an obligation with the authority to sell the property or reconvey the trust deed on
instructions from the mortgage holder (the lender/beneficiary).
Trustor/Borrower: One who borrows money from a trust deed lender, then deeds the real property
securing the loan to a trustee to be held as security until the trustor has performed the obligation to
the lender under terms of a trust deed.
DEED
Grantee/buyer: An individual acquiring an interest in title to real estate.
LEASE
Holdover tenant: A tenant who retains possession of the rented premises after their right of
possession has been terminated.
Lessee/Tenant: One who contracts to rent, occupy and use property under a rental or lease agreement
and thus has legal possession and use of real property belonging to another.
Lessor/Landlord/Owner: One who rents their property to another by entering into a lease or rental
agreement with a tenant.
Property manager: A real estate broker employed by a landlord involved in the marketing,
operation, maintenance and day-to-day financing of rental properties.
OPTION
Optionee: The holder of an option to purchase property. This party may choose to purchase the
property, but is under no obligation to do so.
Chapter 8: Real estate participants 145
Optionor: The owner of a property who gave an optionee the ability to purchase the property in
exchange for consideration. This party is obligated to sell if the optionee chooses to exercise the
option and purchase the property.
Title officer: An employee of a title insurance company that is responsible for the search of records,
clarification and resolution of clouds on title.
Title representative: A title insurance company salesperson who acts as a liaison between clients,
agents and the title officer.
First-time homebuyer: A buyer of property who has not previously owned real estate.
Flipper/speculator: A real estate investor who owns property short-term, purchasing the property
at perceived below-market prices and dependent on market momentum to sell at a profit.
For-sale-by-owner (FSBO) seller: A property owner who markets property for sale without the use
of a Department of Real Estate (DRE)-licensed broker or agent to locate a buyer.
Heir: A person who inherits property on the death of the prior owner.
Independent contractor: A salesperson employed by a broker in a manner that avoids income tax
withholding and unemployment benefits payments by the employing broker.
Investor: A purchaser who holds a property long-term on a buy-to-let basis as an income producing
investment.
Parties/party: People or entities taking part in a real estate transaction as a principal, e.g., a seller,
buyer, tenant or lender.
Syndicator: An individual who solicits cash contributions from investors to fund a limited liability
company (LLC) which will acquire real estate for investment purposes.
SAMPLE QUESTIONS:
1. The holder of a note secured by a trust deed and entitled to the performance of the provisions
in the trust deed is the:
a. mortgagor. c. beneficiary.
b. trustee. d. trustor.
2. The seller under a land sales contract sale is the:
a. grantor. c. beneficiary.
b. grantee. d. vendor.
3. The property owner who has given another party the option to purchase their property at a
later date is the:
a. optionor. c. vendor.
b. optionee. d. vendee.
4. The borrower of mortgage funds is the:
a. trustee. c. mortgagor.
b. beneficiary. d. mortgagee.
5. The buyer under a land sales contract is the:
a. vendor. c. vendee.
b. beneficiary. d. trustee.
6. The person who transfers property by a grant deed is the:
a. grantor. c. trustee.
b. grantee. d. vendor.
7. A party to a note and trust deed with the authority to sell the property on instructions from the
beneficiary is the:
a. lender. c. court appointee.
b. borrower. d. trustee.
8. The tenant who rents an apartment under a month-to-month rental agreement is the:
a. trustee. c. lessee.
b. vendee. d. lessor.
9. The entity that lends mortgage money to a borrower for the purpose of purchasing property is
the:
a. mortgagor. c. trustee.
b. mortgagee. d. vendor.
10. The person who holds an option to purchase property is the:
a. trustor. c. optionee.
b. optionor. d. beneficiary.
11. One who borrows money secured by a note and trust deed from a lender is the:
a. trustor. c. mortgagee.
b. trustee. d. beneficiary.
12. The owner of a rental property is the:
a. vendor. c. lessor.
b. lender. d. lessee.
Chapter 8: Real estate participants 147
ANSWER KEY:
1. c — The trust deed has three parties. The beneficiary is the lender entitled to the performance
of the provision in the trust deed.
2. d — A land sales contract transaction is classified as a vending process. Under a land sales
contract, the seller retains title to the property until all or a prescribed part of the purchase price
has been paid. The owner of real estate is almost always the “or” party. Thus, the seller is the
vendor.
3. a — The option process has similar rules as a land sales contract transaction. The optionor is
the property owner. Further, the optionor is the only party obligated by the terms of the option
if the optionee chooses to exercise the option and purchase the property.
4. c —The borrower of mortgage funds is the property owner. Here, the borrower is described as
the mortgagor. Thus, the borrower gives the lender a mortgage in exchange for funds.
5. c — In a land sales contract sale, the buyer doesn’t obtain title to a property until the terms of
the contract has been fulfilled. Here, the buyer is the vendee.
6. a — The grantor is the person who signs the deed to transfer the property to another, the
grantee.
7. d — A trustee is named by the lender (beneficiary) to act as an intermediary in the event of a
nonjudicial foreclosure.
8. c — The tenant, regardless of the form of the rental or lease agreement, is known as the lessee.
9. b — The lender of mortgage funds takes the “ee” position since there are only the two parties
to the loan. Thus, the mortgagee is the lender who receives a mortgage from the borrower in
exchange for the funds.
10. c — The person who holds the option to purchase real estate does not own it. Thus, they are the
optionee.
11. a —The owner of the property is the borrower who takes out funds secured by a note and trust
deed Thus, trustor is the correct answer.
12. c — The owner of a rental property is the lessor. Note the “or” convention which denotes the
owner of the real estate.
13. d — Regardless of which type of deed is used (grant, quit claim, etc.), the person named as
receiving title is the grantee.
Notes:
Chapter 9: Real estate mathematics 149
MATHEMATICAL BASICS
A very small proportion of the Department of Real Estate (DRE) salesperson and broker licensing
examination consist of math questions. An examinee could miss or skip every math question and
still successfully pass the exam.
Most math questions are solved with basic formulas using a nonprogrammable calculator. A
nonprogrammable calculator is provided during both licensing exams. The examinee is well
advised to use the calculator supplied to ensure their accuracy on the exam questions.
LAND MEASUREMENTS
Here is a review of basic units of land measurement:
• Township = 36 sq. mi. broken up into 36 sections;
• Section = 640 acres and 1 sq. mi.;
• Half section = 320 acres (quarter section = 160 acres; quarter of a quarter = 40 acres);
150 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
PERCENTAGES
A percentage needs to be converted to a decimal before any mathematical computations may be
completed.
When converting percentages to decimals, the basic rule to follow is to move the decimal point two
spaces to the left.
Examples:
50% = 0.5
3% = 0.03
115% = 1.15
Conversely, to convert a decimal to a percentage, move the decimal point two spaces to the right.
Examples:
1.43 = 143%
0.03 = 3%
0.5 = 50%
As the use of a calculator is allowed while taking the licensing exam, it is beneficial to convert all
fractions to decimals and then use the calculator to complete the remaining computations.
FRACTIONS
To understand fractions, it is helpful to understand their basic mechanics. A fraction is composed of
a numerator and a denominator. The number on the top of the fraction is the numerator and the
number on the bottom is the denominator.
When converting a fraction into a decimal, divide the numerator by the denominator.
Examples:
4/5 = 0.8
1/2 = 0.5
3/4 = 0.75
3/100 = 0.03
667/100 = 6.67
Chapter 9: Real estate mathematics 151
The area of a rectangle equals its length multiplied by its width, the result being the number of square
feet within the parcel.
A=LxW
COMMISSION
The percentage formula is a basic calculation used in real estate mathematics. It is typically used to
determine the amount of a broker’s fee (commission) earned on a transaction.
As compensation for services rendered, a broker is entitled to a broker’s fee typically stated as a
percentage of the:
• sales price;
• loan amount; or
• total rents.
The percentage formula is easily converted to suit a variety of situations. Usually, two of the three
variables will be provided in the question, leaving the third variable in the example to be determined.
PROPERTY TAXES
In California, annual property taxes are based on 1% of the assessed value of a property, plus certain
local service fees. Generally, this totals to approximately 1.2%.
The assessed value of a property is based on the original transfer price, the sales price or the amount
stipulated by court, such as in a probate action or divorce settlement.
The values of any improvements made to the property are also added to the assessed value. The total
assessed value increases up to 2% annually under Proposition 13 (Prop 13).
152 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
For example, consider a property purchased for $400,000 in 2019. After the purchase, the new owner
installs a swimming pool which adds $50,000 to the assessed value. In 2020, the tax assessor raises
the value 2% as allowed by Prop 13. The current assessed value is thus $459,000 ($400,000 + 50,000) x
1.02 (base value plus 2%).
TRANSFER TAX
The basic county transfer tax (transfer tax stamps) rate is $0.55 per $500 of valuation.
For values over $500 but less than $1,000, the amount of the transfer tax is rounded up. Several
counties and communities charge additional fees.
Transfer tax is a one-time fee paid at the time title is transferred and recorded.
The income approach formula used for estimating value using the GRM is:
Annual Gross Scheduled Rent x Gross Rent Multiplier (GRM) = Value
Consider a comparable property that sold for $300,000 and had scheduled rents of $24,000 per year. To
calculate the GRM, divide the sales price by the rents ($300,000/$24,000 = 12.5 GRM).
The rate of return an investor expects on their investment after rental operating expenses are
subtracted from rental income is called the capitalization rate (cap rate).
The cap rate is calculated by dividing the NOI by the price asked or offered for income property.
Consider an apartment building that sells for $3,000,000 and produces a NOI of $300,000 annually.
Here, the cap rate is 10% ($300,000/3,000,000 = 0.1).
Be advised that some of the distractor answer selections contained in a math question are based on
common math errors. If theDRE is aware of common math errors, such as an incorrect conversion,
some of the distractor answer selections will likely be based on this frequently miscalculated answer
choice.
Chapter 9: Real estate mathematics 153
SAMPLE QUESTIONS
LAND MEASUREMENTS:
1. The SW 1/4 of the N 1/2 of Section 18 contains how many acres and how many square feet?
a. 80; 3,484,800. c. 80; 3,492,000.
b. 40; 1,742,400. d. 160; 6,984,000.
2. The NW 1/4 of the SE 1/4 of Section 21 sold for $4.00 per square foot. What was the sales price?
a. $1,742,400. c. $13,939,200.
b. $6,969,600. d. $3,484,800.
COMMISSION:
3. A salesperson working under a broker had an employment contract calling for a 50/50 split of
any commissions received. The salesperson negotiated a sale representing the buyer. The sales
price was $490,000. The purchase agreement called for a fee of 3% of the sales price to be paid to
the buyer’s broker. How much did the salesperson receive from their broker?
a. $29,400. c. $7,350.
b. $14,700. d. $735.
4. An experienced salesperson arranged an employment contract calling for a 70/30 split of any
commissions received. The salesperson completed a sale representing both the buyer and seller.
The sales price was $650,000. The escrow instructions called for a 5% fee paid to the broker. How
much did the salesperson receive from their broker?
a. $22,750. c. $16,250.
b. $32,500. d. $9,750.
PROPERTY TAXES:
5. The local and state property taxes on a particular property amount to 1.2% of the tax assessment
value of the property. The tax rolls indicate a current value of $385,000. What is the first half of
the current year’s tax bill?
a. $4,620. c. $3,850.
b. $2,310. d. $1,925.
TRANSFER TAX:
6. At the close of escrow for the sale of a property, the title insurance company obtained transfer
tax stamps for the purchase price of $387,600. How much was the transfer tax charged?
a. $426.80. c. $426.25.
b. $213.13. d. $213.40.
7. At the close of escrow on the sale of a property, the title insurance company obtained transfer
tax stamps for the purchase price of $411,200. How much was the transfer tax charged?
a. $452.10. c. $453.20.
b. $452.65. d. $465.52.
154 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
BUILDING MEASUREMENT
20’
5’
10’
40’
60’
10. Based on the figure above, what is the total square footage and linear measurement of the
perimeter of the sample property?
a. 2,400 sq. ft. / 200 linear ft. c. 2,400 sq. ft. / 210 linear ft.
b. 2,350 sq. ft. / 210 linear ft. d. 2,350 sq. ft. / 200 linear ft.
ANSWER KEY:
1. a — Determining the square footage of a portion of a section requires starting at the end of
the description and working backward. A section contains 640 acres. Thus, the first step in this
problem is:
640 acres / 2 = 320 acres (N 1/2 of a section)
The next step requires dividing the north 1/2 of a section by 4 as the question asks for 1/4 of
the previous portion of the section.
320 acres / 4 = 80 acres (SW 1/4 of N 1/2 of a section)
Chapter 9: Real estate mathematics 155
Finally, multiply 80 acres by the square footage in an acre (43,560 sq. ft.).
43,560 sq. ft. x 80 acres = 3,484,800 sq. ft.
2. b — Here again, begin with the section (640 acres) and divide by 4 (the SE 1/4 of the section).
640 acres / 4 = 160 (SE 1/4 of the section)
Next, divide 160 by 4 (the SW 1/4).
160 acres / 4 = 40 acres (NW 1/4 of SE 1/4 of a section)
Multiply 40 acres by the square footage in an acre (43,560 sq. ft.).
43,560 sq. ft. x 40 = 1,742,400 sq. ft.
Finally, now that it is known how many square feet are in this parcel of land, multiply this
total by the price per square foot.
1,742,400 sq. ft. x $4 = $6,969,600
Solution: $6,969,600.
Remember, this four-step question is still only worth one point, just the same as any other
question on the exam.
3. c — In this first commission problem, we are told that the property sold for $490,000 with a 3%
commission paid to the buyer’s broker. This first step looks like this:
$490,000 x 0.03 = $14,700
Next, calculate the 50% portion of the broker’s $14,700 fee that is paid to the salesperson.
$14,700 x 0.5 = $7,350
Solution: $7,350.
4. a — In the second commission problem, the total fee paid to the broker is 5% of the sales price.
$650,000 x 0.05 = $32,500
In this scenario, the more experienced salesperson earned 70% of the $32,500 fee and repre-
sented both the buyer and the seller.
$32,500 x 0.7 = $22,750
Solution: $22,750.
5. b — Annual property taxes are calculated as a percentage of the assessed value and are paid in
two installments. Begin by calculating the total annual tax on a property valued at $385,000.
$385,000 x 0.012 = $4,620
Note the question asked only for the first installment, not the annual total.
$4,620 / 2 = $2,310
Solution: $2,310.
156 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
6. a — At the close of escrow, a tax is paid to the county as part of the recording process. The basic
tax rate is $0.55 per $500. For this problem, first determine the rate per $1,000.
$0.55 x 2 = $1.10 per $1,000
Remember, transfer tax is charged by rounding up to the next $500 increment. Therefore, in
this problem, the value is rounded up to $388,000. Since the tax rate will be calculated on a
per $1,000 basis, divide the rounded sales price by 1,000.
$388,000 / 1,000 = $388
Next, multiply this total by the $1.10 transfer tax stamp rate.
$388 x $1.10 = $426.80
Solution: $426.80.
7. b — This second transfer tax problem is solved in three steps. Once again, determine the rate
per $1,000.
$0.55 x 2 = $1.10 per $1,000
Next, multiply by the thousand-dollar multiple of the sales price.
$1.10 x $411 = $452.10
Finally, since the sales price included an additional $200 over the $411,000, round the $200
up to $500. Add $0.55 to the previous calculation for the additional $500.
$452.10 + $0.55 = $452.65
Solution: $452.65.
8. c — The multiplier method for calculating a property’s value under the income approach has
two steps when the multiplier is known, as is the case in this question.
Start by determining the total annual rents generated by an income-producing property.
$1,200 (rent per unit) x 2 (units) x 12 (months) = $28,800
Next, multiply the gross rents ($28,800) by the GRM given in the question (12.5).
$28,800 (total rent) x 12.5 (GRM) = $360,000
Solution: $360,000.
9. a — The capitalization method requires knowing the net operating income (NOI) and the
appropriate cap rate. First, place the two numbers provided in the question into the cap rate
formula.
$24,000 (NOI) = 12% (cap rate) x P (price)
Next, divide the NOI by the cap rate.
$24,000 / 0.12 = P
P = $200,000
Thus, the buyer is to pay no more than $200,000 to yield a 12% rate of return.
Solution: $200,000.
Chapter 9: Real estate mathematics 157
The first step is to create two rectangles by enclosing the inset entry. The larger one (A) is the
total size of the building. The smaller one (B) is the space outside the building.
Next, determine the size of the larger rectangle (A).
60 ft. x 40 ft. = 2,400 sq. ft.
Then calculate the size of the smaller rectangle (B).
5 ft. x 10 ft. = 50 sq. ft.
The fourth step requires subtracting the exterior rectangle (B) from the larger, internal rect-
angle (A).
2,400 sq. ft. – 50 sq. ft. = 2,350 sq. ft.
Finally, add all the exterior walls together to determine the linear measurement.
60 ft. + 40 ft. + 20 ft. + 5 ft. + 10 ft. + 5 ft. + 30 ft. + 40 ft. = 210 ft.
Math scenarios
The consensus among recent examinees is unanimous: there are very few math questions on the
State Exam. Some even report there are absolutely no math questions.
Generally, if there are math questions, they will be phrased as a scenario designed to test your
comprehension of the underlying concept, not your ability to actually work through the formulas
and crunch the numbers.
For instance, you may see a question regarding the split of a commission between a hypothetical
broker and an agent. Or you may see a question about a surveyor who needs to calculate how many
square feet are in an acre.
surplus language is included and dense sentence structures are often employed. Scenario questions
also tend to be longer as they contain more information with variables for the student to consider.
Thus, a key component to correctly answering scenario questions is the ability to isolate which parts
of the question are critical to arriving at the correct answer, and which parts are added only as a
distraction to increase the difficultly level of the question.
Recall that the state intends for half of examinees to fail. The exam is not meant to be easy. It’s
meant to challenge and allow only the most diligent applicants into the industry.
Every effort is made to mirror the style and character of the State Exam questions in these materials
— and this includes the use of sometimes deliberately opaque language. This is not done to be cruel
— this is done to prepare you for what the State Exam will be like.
All this is to say you need to be prepared for some tough questions.
SAMPLE QUESTIONS
1. Margaret buys a home from Daniel. Under the terms of the purchase, Margaret assumes
Daniel’s existing loan. The lender consents, issuing a substitution of liability. What best
describes the outcome of this arrangement?
a. Daniel remains primarily responsible for the loan. However, in the event Daniel goes
into default, Margaret will become secondarily liable.
b. Margaret is primarily responsible for the loan. However, in the event Margaret goes
into default, Daniel will become secondarily liable.
c. The lender may immediately accelerate the loan.
d. Daniel is relieved from liability and further performance under the loan.
2. Agent Andrew examines an appraisal report written by an appraiser. Agent Andrew observes
the appraisal report is divided into three primary sections: (1) Introduction, (2) Description of
the area, neighborhood and property, and (3) Analysis, conclusions and opinions of value.
Based on its format, the appraisal report being viewed by Andrew is most likely a:
a. Short form report. c. Letter report.
b. Narrative report. d. Broker price opinion (BPO).
Chapter 10: Real estate scenario questions 161
3. Seller Octavio enters into an exclusive listing agreement with Broker Waters. Agent Jackson,
who is employed by Waters, prepares marketing materials to advertise the property. The
marketing materials indicate the property features multiple large structural additions and
is in good condition. Buyer Lupe sees the advertising and contacts Jackson. Jackson shows
Lupe the property, indicating the roof is brand new and that the additions were built to code
and constructed with the proper permitting. Based on these representations, Lupe submits an
offer to purchase the property to Octavio. One day after the close of escrow, Jackson provides a
Transfer Disclosure Statement (TDS) to Lupe which indicates the roof is 15 years old and none
of the additions are properly permitted. Lupe attempts to recover from Waters, Jackson and
Octavio for fraud. Lupe is awarded damages from Octavio but is unable to recover from Waters
and Jackson who have become insolvent. What remedy is the best option for Lupe?
a. Errors and Omissions (E&O) insurance. c. Homeowners’ insurance.
b. Private mortgage insurance (PMI). d. The Real Estate Recovery Fund.
4. An appraiser is hired to appraise a single family residence (SFR) in an older community. The
appraiser observes an abandoned industrial plant next door with large tanks for the storage
of chemicals and is concerned about contaminants. Of the following choices, which is the
appraiser most likely to recommend first?
a. A soil report by a certified home inspector.
b. A survey conducted by a Phase I environmentalist.
c. A toxic waste report from the environmental protection agency (EPA).
d. A natural hazard mitigation plan.
5. Jennifer is a mortgage broker. Harold is a mortgage banker. How would you describe the
differences in Jennifer and Harold’s duties and functions?
a. Jennifer finds the loan. Harold funds it.
b. Jennifer services the loan. Harold finds it.
c. Harold services the loan for a financial institution. Jennifer funds it.
d. Harold and Jennifer do the same thing, but Jennifer possesses an additional
endorsement on her license.
6. Harvey has been hired to conduct a survey of raw land located outside of the city center.
Public utilities have yet to be connected to the land. The land is a quarter of a section. How
many acres is it?
a. 640. c. 160.
b. 320. d. 36.
7. Betsy purchases a property in a rural area that receives water from a local tributary and obtains
stock in a mutual water company. All of the following statements are correct, except:
a. The mutual water company possesses the right to take water from a local source and
share the water with the landowners who live in the area.
b. When Betsy sells her property, she retains ownership of her stock.
c. The mutual water company is a corporation formed by the state of California.
d. The stock owned by Betsy is appurtenant to the land.
162 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
14. Agent Seth is employed by Broker Rachel. Seth enters into an exclusive listing with a property
owner to sell their property. At the same time, Agent Bethany, who is also employed by Rachel,
works separately with a buyer to locate qualifying properties listed with other brokers. Agent
Bethany shows her buyer a property that is the subject of an in-house listing. What does this
do to Rachel’s agency status?
a. Rachel becomes a dual agent the moment Bethany’s buyer is exposed to a property that
is the subject of an in-house listing.
b. Rachel becomes a subagent of Bethany’s buyer.
c. Rachel may not allow Bethany to show her buyers any in-house listings.
d. Nothing about Rachel’s agency status changes.
15. Harry is hired to appraise an apartment complex in a populous area close to areas of
employment. To determine the property’s value based on the property’s future income and
operating expenses, Harry divides the property’s net operating income (NOI) by a capitalization
rate (cap rate). What appraisal method does this practice best represent?
a. Income method. c. Cost approach.
b. Gross rent multiplier method. d. Capitalization method.
16. A new development is constructed under the smart growth planning theory. The development
contains compact, walkable areas that are designed to avoid sprawl. This concept of smart
growth is most applicable to what type of property?
a. Rural. c. Suburban.
b. Urban. d. Both rural and urban property equally.
17. Broker Bishop and Broker Bailey enter into an open listing to sell Seller Sanders’ property.
Bailey locates Buyer Hernandez who may be interested in the property and conducts an open
house tour with Hernandez. Hernandez asks about the tax aspects of acquiring the property,
and Bailey answers to the best of his knowledge, letting Hernandez know he is not a tax expert
and his representations are based on his knowledge of real estate. Hernandez gets cold feet
and decides not to submit an offer. One month later, Bishop comes in contact with Hernandez
and conducts a second open house of Sanders’ property. Informed by both open houses and
his discussion with both brokers, Hernandez submits an offer to purchase through Bishop.
How is Sanders to properly handle payment of the commission?
a. The full amount of the commission agreed to in the listing is paid to both brokers since
both helped to facilitate the purchase.
b. The full amount of the commission is paid to Broker Bishop only since he ultimately
was the producing cause of the sale.
c. The full amount of the commission is paid to Broker Bailey only since he spent more
time with the buyer and provided more information to Buyer Hernandez.
d. The commission is split evenly between both brokers since they both worked with
Buyer Hernandez.
18. A buyer enters into a purchase agreement with a seller conditioned on the buyer obtaining
loan financing. The buyer contacts a lender who agrees to fund the loan. The buyer pays
multiple points upfront to the lender. What does this do to the note rate on the mortgage?
a. The note rate will remain the same and the principal amount will decrease.
b. The note rate will increase and the principal amount will increase.
c. The note rate will decrease and the principal amount will increase.
d. The note rate will decrease and the principal amount will remain the same.
164 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
19. Riley is hired to conduct an appraisal of a property. While analyzing the location of the
property, Riley observes the property is situated behind other lots and is connected to the
public street by a long and narrow driveway. This kind of lot is referred to as a(n):
a. Key lot. c. Interior lot.
b. Flag lot. d. Corner lot.
20. Property developer Joaquin would like to purchase 175 acres of raw land as the site of a future
subdivision. The property is being sold for $800,000 cash. Joaquin lacks the funds to purchase
the property and is unable to obtain traditional financing. Joaquin convinces his friend
Davidson to purchase the land for him. Davidson acquires the land with his own funds. After
closing, Davidson executes a land sales contract of the property to Joaquin for $825,000. This is
an example of a:
a. valid purchase and resale of a property.
b. discounted mortgage arrangement.
c. void transfer of ownership.
d. violation of the Real Estate Settlement Procedures Act (RESPA).
21. Architect Franklin is studying a document related to the construction of a neighborhood. The
documentation shows how the tract of land is divided into designated lots. It also displays
the boundary and size of each lot of the development, as well as nearby streets and recorded
easements. What type of document is Franklin most likely looking at?
a. A plot plan.
b. A topographic map.
c. A plat map.
d. The conditions, covenants and restrictions (CC&Rs) of a community.
22. Broker Wyatt would like to launch a direct mail advertising campaign in which Wyatt solicits
advance fees to fund a specified short sale-related service for the benefit of the principal. Wyatt
submits the planned promotional materials to the Department of Real Estate (DRE) for review.
One week later, Wyatt begins sending his mailers. What did Wyatt do wrong?
a. Wyatt did not wait fifteen days before circulating his advertisement.
b. Wyatt did not obtain approval from the DRE before circulating his advertisement.
c. Wyatt cannot solicit for advance fees in relation to any short sale activity.
d. Wyatt first needs to obtain approval from the U.S. Postal Service before he may launch
a direct mail program.
23. Palmer purchases and occupies a single family residence (SFR) as his primary residence. Seven
years into his ownership, the city constructs a freeway two blocks away from his house. The
new freeway increases traffic congestion in the area. Further, Palmer is able to hear the sound
of the freeway while in his backyard. What is this situation an example of?
a. Functional obsolescence. c. Demographic degradation.
b. Physical deterioration. d. Economic obsolescence.
24. Jessica purchases a property in a homeowners’ association (HOA) community. Jessica hires
a local contractor to make significant upgrades to the property, such as the installation of a
renovated bathroom and an addition which adds living space to the property. A pool is also
installed in the backyard. The other property owners in the neighborhood do not properly
maintain their properties and do nothing to upgrade them. When Jessica later sells the
property, what principle of value will be illustrated?
a. The principle of regression. c. The principle of conformity.
b. The principle of progression. d. The principle of substitution.
Chapter 10: Real estate scenario questions 165
25. Jonas is a certified residential appraiser. Jonas is hired to conduct an appraisal on a commercial
property in an adjacent city. Jonas diligently examines the property and the surrounding area.
Over the course of his activities, Jonas arrives at different valuations of the property under the
market comparison approach, the cost approach and the income approach. What is Jonas’ next
step?
a. Average the three valuations together to arrive at the final value of the property.
b. Select the highest value obtained under the three approaches, then justify their
conclusion to the principal.
c. Select the value which best relates to the property being appraised from the values
arrived at under the three approaches.
d. Give the principal a numerical range spanning the lowest value to the highest value.
8. a – The market comparison approach is the most commonly used approach to establish the
fair market value (FMV) of real estate. Applying the market comparison approach, the appraiser
looks at the current selling prices of similar properties to help establish the comparable value
of the property being appraised. Adjustments are made for any differences in the similar
properties, such as amenities.
9. a – A stock cooperative refers to an apartment building that is owned by a corporation.
Tenancy in an apartment unit is obtained by the purchase of shares of stock in the corporation.
The owner of such shares is entitled to occupy a specific apartment within the building.
10. d – The question describes a colonial style home — one of the most popular styles homes
in the United States. Answer selection A. Ranch is only one story. Answer selection B.
Contemporary refers to a wide range of homes built in recent decades. The contemporary
style tends to feature open floor plans and concentrate on simple forms, free of elaborate
ornamentation. Answer selection C. Walk-up refers to a multi-story apartment complex that
doesn’t contain an elevator, and thus is the least appropriate of the answer selections.
11. c – California’s fiscal year runs from July 1st to June 30th. Property taxes are generally collected
in two equal installments. The first installment for July 1st through December 31st is due on
November 1st and becomes late after December 10th. The second installment for January 1st
through June 30th is due on February 1st and becomes late after April 10th.
12. d – Unless escrow receives mutual instructions to disburse the funds held in escrow when
escrow fails to close, escrow is to deposit the funds with the court. This relieves escrow of any
further responsibility to account for the funds, called an interpleader. Thus, escrow can close
out its trust account on this escrow file.
13. b – The capitalization rate (cap rate) is the annual rate of return produced by the operations
of an income property. The cap rate is calculated by dividing the net operating income (NOI) by
the price asked or offered for the income property. The cap rate is used to estimate the annual
rate of return on invested capital.
14. a – When the agent of a buyer shows their buyer an in-house listing that is owned by the
buyer’s employing broker, the broker becomes a dual agent. Here, the broker, through their
agents, is concurrently representing both the buyer and the seller of the property the buyer is
being exposed to. This relationship will be documented in the Agency Confirmation Provision
included in transaction documents.
15. d – The capitalization method is the best answer of the selections provided. The capitalization
method is used by an appraiser to arrive at a property’s value based on the present worth of a
property’s future net operating income. Answer selection B. Gross rent multiplier method
uses the potential or gross rent multiplied by a gross rent multiplier (GRM) to determine
value. Both of these answers are methodologies applied under the income approach that is
used for properties that generate rental income. Note answer selection A. Income method
incorrectly uses the term “method” versus “approach,” and can thus be eliminated.
16. b – Smart growth is primarily an urban planning theory which seeks to concentrate growth
in dense, compact urban centers. The principal objective of smart growth is to avoid sprawl.
While this methodology could also be applied to other types of property to a lesser extent,
it is most applicable to urban properties. This question illustrates the need to select the best
answer. Though other selections may be partially correct, only B. Urban is the best option.
Chapter 10: Real estate scenario questions 167
17. b – Regardless of the extent of real estate activity conducted by other brokers, only the broker
who was the procuring cause of the sale is entitled to a fee under an open listing. Note the
extent to which the question comments on the other activities performed by Broker Bailey,
the first broker who was not the procuring cause of the sale. This is irrelevant to the collection
of a fee. Once the question makes it clear the brokers are operating under an open listing, the
only fact that controls is which broker was the procuring cause.
18. d – Points are a fee charged by a mortgage lender as prepaid interest. Payment of a point
causes a reduction in the note rate on the mortgage. However, the payment of a point will
have no effect on the principal balance of a mortgage. A point equals 1% of the amount of the
mortgage.
19. b – A flag lot is located behind other lots with a long and narrow access driveway to a public
street. Thus, it resembles the shape of a flag with the road representing the pole and the lot
representing the flag. Flag lots generally have a reduced value due to the lack of privacy
that results from being surrounded by other homes. Flag lots also lack curb appeal. Similarly,
answer selection C. Interior lot references a lot that is surrounded by lots on all three sides
and does not feature a long driveway connecting it to a public street. An interior lot is the most
common type of lot, and is usually rectangular in shape.
20. a – This scenario describes a valid and legitimate purchase and resale of a propety. Here, a
colleague purchased a property at the request of his friend. In return, the friend agreed to
purchase the property from his colleague under a land sales contract at a higher price. No
deceit or improper conduct occurred.
21. c – A plat map shows how a tract of land is divided into lots. It also displays the size, boundary
locations, nearby streets, flood zones, easements and rights of way which relate to the project.
Answer selection A. a plot plan is a tempting red-herring. A plot plan shows where a building
and other site improvements will be located on an individual lot. In terms of scale, a plat map
relates to a whole neighborhood or development. A plot plan refers to a single property.
22. b – A broker needs to obtain approval from the Department of Real Estate (DRE) prior to
soliciting for an advance fee. The advance fee paperwork must be submitted to the DRE for
approval at least 10 days prior to use.
23. d – Economic obsolescence is a loss in value of a property due to external factors and not due
to the condition of the property itself. In this question, the construction of the freeway close
to the owner’s house — an external factor — contributed to a loss in the value of the property.
Answer selection A. Functional obsolescence relates to a loss in the property’s value due
to outdated style or non-usable space. Answer selection B. Physical deterioration refers to
a loss in the property’s value due to wear and tear, which is not referenced in the scenario of
the question.
24. a – The principle of regression holds that the value of the best property in a neighborhood
will be adversely affected by the value of other properties in the neighborhood. In this
question, the property owner adds numerous significant upgrades. However, none of the
owner’s neighbors improve their properties to a similar degree, nor do they properly maintain
them. Thus, the neighboring properties exert a negative influence on the subject property
which is no longer in keeping with the characteristics of the surrounding community. Both
answer selections A. and B. are tied to answer selection C. the principle of conformity.
Starting with the conforming property in the neighborhood, other properties either progress
or regress depending on their comparison to the conforming property.
168 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
25. c – Different values arrived at under the various appraisal approaches requires the appraiser
to correlate or reconcile the values. Here, the appraiser selects the most appropriate value
based on the property being appraised and its type. For instance, a value arrived at under the
income approach would not be used to value residential property that is owner-occupied as it
generates no income.
Simulated Exam #1 169
SIMULATED EXAM #1
1. Real property that is acquired by a neighbor through natural processes such as erosion is an
example of:
a. appurtenance. c. accretion.
b. a prescriptive easement. d. avulsion.
2. If evidence of active infestation is found, a structural pest control report is required to be
provided:
a. when the home being purchased is financed by a Federal Housing Administration
(FHA)-insured loan or U.S. Department of Veterans Affairs (VA)-guaranteed loan.
b. whenever requested by the buyer, whether or not the seller agreed to do so in the
contract.
c. in every sale involving a wood-frame residence.
d. in every sale of a foreclosed property that has been unoccupied for greater than one
year.
3. A purchaser of a condominium unit requests a copy of the conditions, covenants and
restrictions (CC&Rs) and bylaws. These documents need to be provided within:
a. one week. c. three weeks.
b. ten days. d. any time prior to close of escrow.
4. The expression “company dollar” refers to:
a. money required to establish a brokerage office from scratch.
b. money left over after a salesperson’s share of a commission has been paid.
c. net income after taxes.
d. the desk fee paid by the agent to their employing broker.
5. If an appraiser uses improper valuation methods or is negligent in completing a government
loan assignment, they may be guilty of:
a. violating appraisal ethics. c. committing a felony.
b. violating real estate law. d. Both a. and c.
6. The calendar date that is of most concern to an appraiser is the date:
a. the loan was originated. c. the purchase contract was signed.
b. escrow closed. d. escrow was opened.
7. Fee amounts are always:
a. 6% of the price received for a property. c. nonnegotiable and set by law.
b. 2%-8% of the price received for a property. d. negotiable and not fixed by law.
8. The term “kiosk” refers to a(n):
a. commercial warehouse. c. storage warehouse.
b. dome frequently found on churches. d. open-sided booth.
9. Agency relationships may not be solely created by:
a. voluntary offer by the agent. c. ratification.
b. implied contract. d. necessity or emergency.
170 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
10. When representing their client to third persons in a sale, a licensed real estate broker is
operating under the law of:
a. real estate. c. power-of-attorney.
b. agency. d. licensure.
11. Gloria is considering an income-producing property to purchase as an investment. In analyzing
its suitability for investment, what is Gloria most interested in?
a. The net operating income. c. The property’s operating expenses.
b. Taxes to be paid on the property. d. The capitalization (cap) rate.
12. occurs when a listing agent deletes provisions on the face of a buyer’s signed
purchase agreement and adds copy to replace the deleted material.
a. Editing c. Interlineation
b. Obliteration d. Conformance
13. A contract has been fully executed when it has been:
a. entered into. c. signed and delivered.
b. signed, notarized and recorded. d. completely and fully performed.
14. Real property that builds up along a riverbank is acquired through:
a. a quit claim deed. c. accession.
b. escheat. d. a quiet title action.
15. A metropolitan area where the cities within it have grown together is known as a(n):
a. megalopolis. c. planned unit development (PUD).
b. suburb. d. matrix sprawl.
16. When a salesperson’s employing broker dies, the salesperson needs to:
a. stop all real estate activity immediately until they find a new employing broker.
b. continue working for up to 30 days.
c. continue working if there is an office manager appointed by the broker with two years’
experience within the last five years.
d. continue working for up to 60 days or until another broker takes over the office or the
office is closed.
17. The final step in the appraisal process is to:
a. reconcile the different approaches and arrive at a conclusion.
b. average the values from the different approaches to arrive at a conclusion.
c. assign values and estimate the total.
d. justify the sales price.
18. The principle that housing passes down to lower economic groups would be:
a. Crane’s Law. c. filtering down.
b. supply and demand. d. correlative theorem.
19. When a broker solicits and accepts a deposit on the purchase of real property without express
written authorization from the owner to sell the property, the broker is:
a. guilty of converting a customer’s funds for their own benefit.
b. guilty of violating their fiduciary duty to the owner.
c. acting as an agent for the buyer.
d. acting under a restricted listing.
Simulated Exam #1 171
20. A real estate broker generally acts from a position of trust for the seller or buyer. This is described
legally as a(n):
a. fiduciary relationship. c. dual agency.
b. ostensible alliance. d. independent contractor relationship.
21. Nathan agreed to list his property for sale with Broker Chan. In the listing agreement, Nathan
specified Broker Chan is not authorized to accept a deposit towards the purchase price from the
buyer. What happens if Broker Chan produces a buyer?
a. He must refuse to accept any deposit.
b. He cannot present the offer as written.
c. If he accepts a deposit, he holds it as an agent of the buyer until the offer is accepted by
the seller.
d. If he accepts a deposit and the buyer rescinds the offer prior to acceptance by the seller,
Chan is entitled to one-half of the deposit.
22. A(n) is an individual’s opinion or estimate of a property’s value on a specific date.
a. termite inspection c. appraisal
b. home inspection d. open house
23. The employment agreement between a broker and a salesperson needs to be retained by the
broker and salesperson for:
a. three years from the date of the execution of the contract.
b. three years from the date of the termination of the salesperson’s employment.
c. four years from the date of the termination of the salesperson’s employment.
d. five years from the date of the termination of the salesperson’s employment.
24. How soon must a broker deposit a client check that is made out to the broker’s trust account?
a. One business day. c. Three business days.
b. Two calendar days. d. One week.
25. Who must receive a copy of the structural pest control report?
a. The buyer. c. The broker.
b. The title insurance company. d. The escrow company.
26. A broker presented a written offer to their seller from a buyer. The offer stated that upon
acceptance, the buyer would deposit $25,000 in escrow. The seller made a counteroffer but did
not change the amount of the deposit and sent it back to the buyer. The buyer agreed to all the
changes, but lowered the amount of the deposit to $10,000. All of the following statements are
correct, except:
a. The broker needs to get the seller’s acceptance of the counteroffer.
b. The buyer has created a counteroffer due to the changed deposit amount.
c. The contract is fully enforceable.
d. No contract exists.
27. The relationship between a vendor and vendee under a land sales contract is most similar to
the relationship between a(n):
a. trustor and trustee. c. escrow office and principal.
b. broker and seller. d. seller and buyer.
172 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
37. A property owner lost their job. The owner’s loan payments were made for them since they
had a(n):
a. Federal Housing Administration (FHA)-insured loan.
b. U.S. Department of Veterans Affairs (VA)-guaranteed loan.
c. California Housing Financing Agency (CalHFA) loan.
d. CalVET Home Loan.
38. Alienation of title refers to:
a. a cloud on title. c. recording a homestead declaration.
b. angering another. d. transferring an estate.
39. All of the following statements are true regarding a notary acknowledgement contained in a
grant deed, except:
a. It does not need to be notarized by the grantee.
b. The notary needs to stamp it with their official seal.
c. The notary needs to keep a record of the identification of the person acknowledging the
deed.
d. It does not need to be signed by the grantor.
40. Successful marketing materials are generally held to include the following four critical
elements:
a. disclosures, price, location, size.
b. number of bedrooms, baths, size, and location.
c. location, amenities, price, and size.
d. attention, interest, desire, and action.
41. If a newspaper advertisement run by a licensee fails to identify their name or license number,
this is referred to as:
a. misleading conduct.
b. a violation of the Truth-in-Lending Act (TILA).
c. a blind ad.
d. unethical behavior.
42. Confidential financial information about a principal obtained by a broker during the course of
a real estate transaction needs to be kept confidential for how long?
a. Three years after the close of escrow. c. So long as the agency relationship lasts.
b. Only until the close of escrow. d. Forever.
43. A seller enters into an exclusive right-to-sell listing with an agent but does not receive a copy
of the signed agreement. The seller, believing this relieves them of any obligations, personally
sells the property while the listing is in effect. What is the outcome?
a. The listing is invalid and the broker is liable to be disciplined.
b. The broker did nothing wrong.
c. The listing is valid and enforceable, but the broker is liable to be disciplined.
d. The broker may be disciplined only if they accept the commission.
174 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
44. A buyer’s agent submitted on offer to purchase a home to a seller along with a $10,000 personal
note as the earnest money deposit. The buyer’s agent is to:
a. inform the seller that the earnest money deposit is a personal note prior to the seller’s
acceptance of the offer.
b. avoid telling the seller what form of earnest money deposit that accompanies the offer
is in.
c. never accept a personal note as an earnest money deposit.
d. refuse to present the offer.
45. A residential mortgage primarily for personal, family or household use and secured by a deed
of trust on a dwelling is known as a:
a. consumer purpose mortgage. c. public project loan.
b. adjustable rate mortgage (ARM). d. swing loan.
46. To make a formal declaration that a statement is true without giving an oath is a(n):
a. acknowledgment. c. affidavit.
b. affirmation. d. deception.
47. All of the following are essential to creating a valid contract, except:
a. lawful object. c. capable parties.
b. mutual consent. d. written documentation.
48. Broker Wallace represented a young man in the sale of his home. After purchase terms
had been agreed to and the grant deed had been signed and delivered into escrow, the title
company discovered the seller was not yet 18 years old and was not emancipated. The grant
deed is:
a. illegal. c. void.
b. voidable. d. valid.
49. In order to form a binding agreement, an offer or counteroffer:
a. needs to be accepted in its entirety and without conditions.
b. needs to be accepted with minor changes in conditions.
c. may be accepted with minor changes if both parties agree to address the conditions
within 15 business days.
d. must contain a provision that specifies which state law controls the transaction.
50. In a §1031 real estate exchange, “boot” does not refers to:
a. unlike property received. c. mortgage relief.
b. cash received. d. like-kind consideration.
51. A group of competing brokers who collectively set commissions based upon an agreed-to
minimum commission schedule are:
a. in violation of antitrust law.
b. conducting aggressive business practices.
c. not in violation of ethic laws.
d. in violation of trust fund accounting requirements.
Simulated Exam #1 175
52. To avoid a taxable gain, a property owner may exchange their commercial property with:
a. a personal residence with a loan on it equal to or greater than the mortgage on their
commercial property.
b. stocks and bonds of equal value.
c. a more valuable apartment building, assuming a larger loan and paying cash boot to
balance the equities.
d. a less valuable commercial complex, receiving money from the other party to
compensate for any difference in equities.
53. On appraisals of older apartment buildings, a major problem in the cost method is:
a. that construction methods and styles have changed.
b. that construction materials have changed.
c. the determination of accrued depreciation.
d. the determination of rental revenue generated by the property.
54. When an appraiser attempts to establish the value of a commercial building, what type of
property is least affected by changing economic conditions?
a. A medical building. c. An automobile dealership.
b. A videogame outlet. d. Fast-food franchise.
55. All of the following information is included in the form style of an appraisal report, except:
a. a site analysis. c. a market analysis.
b. a description of the improvements. d. loan and financing data.
56. The land residual method of appraisal is used to determine the value of the:
a. land alone. c. building and land.
b. building alone. d. unearned increment.
57. What must an appraiser do when they are hired to appraise a property owned by a corporation
in which the appraiser owns a share?
a. Refuse the assignment.
b. Disclose their ownership interest in the property and accept the assignment.
c. Disclose their ownership interest in the property and reduce their fee in equal proportion
to their ownership share in the corporation.
d. Ignore the issue unless they hold a majority interest in the property.
58. When the due-on clause in a trust deed is triggered, the lender may recast or call the loan, also
known as:
a. subordination. c. reconciliation.
b. waiver by proxy. d. acceleration.
59. Who pays the points on a CalVet Home Loan?
a. The buyer. c. The State of California.
b. The seller. d. No one pays the points.
60. A mortgage broker’s fee is customarily paid by the:
a. lender. c. borrower.
b. seller. d. underwriter.
176 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
72. As opposed to condominium ownership, cooperative ownership has the disadvantage that:
a. owners could lose their equity if the other cooperative owners fail to make their tax and
loan payments.
b. owners cannot deduct tax payments made to the cooperative.
c. owners’ costs are greater than in a condominium.
d. owners have less control over the exterior of their property.
73. The federal Loan Estimate is to be delivered to a borrower:
a. within three business days of receipt of a consumer mortgage application.
b. within three business days of closing.
c. no more than one calendar day before the close of escrow.
d. at least ten business days from the date of the loan commitment.
74. A seller’s broker receives a written offer on a listed property. The broker is certain the seller will
not accept it. The broker may do all of the following, except:
a. Write new terms on the back of the offer and go back to the buyer for approval.
b. Change the offer price to what the broker thinks the seller will accept, and initial the
change.
c. Present the offer to the seller as written.
d. Present the offer to the seller, but advise them not to accept it.
75. The Federal Truth-in-Lending Act (TILA) defines the annual percentage rate (APR) as:
a. the total of only the direct costs of credit paid by a borrower.
b. the total of all costs which the borrower needs to pay in order to get the loan.
c. the relative cost of credit expressed in percentage terms.
d. the difference between the 10-year Treasury Note and the 3-month Treasury Bill.
76. A loan that allows the borrower to make monthly payments less than the interest accruing is
referred to as a(n):
a. 80/20 loan. c. hybrid loan.
b. straight loan. d. option adjustable rate mortgage (ARM).
77. The lowest closing costs other than the down payment are realized using a:
a. Federal Housing Administration (FHA)-insured loan.
b. U.S. Department of Veterans Affairs (VA)-guaranteed loan.
c. CalVET Home Loan.
d. conventional loan.
78. A bank loans Lauren $850,000. Part of the loan agreement calls for Lauren to keep $20,000 of
the loan funds on deposit with the bank for the life of the loan. This is an example of:
a. prepaid charges. c. risk management.
b. yield enhancement. d. compensating balance.
79. All of the following statements are false regarding the agency duty held by a buyer’s agent,
except:
a. The agent represents the buyer only.
b. The agent is a dual agent of both the buyer and seller.
c. The agent may charge an advance fee to the buyer.
d. There are only agents of sellers in California.
178 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
80. Unless fraud is involved, an action against a licensee by the Real Estate Commissioner needs
to be initiated within ________ of the occurrence of the alleged violation.
a. two years c. four years
b. three years d. five years
81. The organization responsible for the enforcement of proper sewage and sanitation construction
practices in a subdivision is the:
a. State Sewage Department.
b. Real Estate Commissioner.
c. local health department.
d. Department of Housing and Urban Development (HUD).
82. Harold wills the family estate to his son Patrick on the condition Patrick marry before title will
be transferred. This is an example of a:
a. covenant. c. condition precedent.
b. restriction. d. condition subsequent.
83. A real estate agent may not represent all principals in a transaction when:
a. they have obtained the consent of all parties to this dual agency relationship.
b. they have informed all principals they are the agent of each principal.
c. they are collecting commissions from each principal with the knowledge of the others.
d. they fail to disclose their dual agency status the moment it arises.
84. The real estate disclosure law that became effective January 1, 1988 concerns:
a. agency relationships.
b. people who arrange credit.
c. disclosures made by property sellers.
d. the federal Truth-in-Lending Act (TILA).
85. Marc purchased an apartment building for $2,000,000. The list price was $2,500,000. Marc
put $500,000 down and acquired a new first trust deed for the difference. Marc’s cost basis for
income tax purposes is:
a. $500,000. c. $2,000,000.
b. $1,500,000. d. $2,500,000.
86. The proper order of events in a court proceeding involving real estate is:
a. judgment, attachment, execution. c. judgment, execution, attachment.
b. attachment, judgment, execution. d. execution, judgment, attachment.
87. The Real Estate Commissioner is primarily concerned with financial arrangements in a
subdivision. If the Commissioner wishes to rescind approval of a subdivision, they would:
a. ask the sheriff to arrest the subdivider for fraud.
b. issue an injunction against future sales of parcels in the subdivision.
c. issue a desist and refrain order.
d. suspend the developer’s license.
Simulated Exam #1 179
96. All of the following transactions do not require compliance with the agency law, except:
a. A duplex sold by an owner. c. A transfer between parent and child.
b. A trustee’s sale. d. The sale of commercial property.
97. An appraisal is valid for what length of time?
a. One year. c. Ninety days.
b. Six months. d. The date stated in the report.
98. All of the following are not required in order to transfer fee title to a parcel of real estate, except:
a. All existing loans are to be paid off.
b. Consent to the transfer needs to be obtained from all lenders who hold an interest in the
property.
c. A reconveyance deed from the trustee needs to be recorded.
d. Delivery of a valid deed.
99. Which of the following parties is in the weakest position against loss of property due to a claim
of title by a third party?
a. The person possessing an unrecorded quitclaim deed who does not occupy the property.
b. The person possessing an unrecorded grant deed who occupies the property.
c. The person possessing a certificate of title issued by a title company.
d. The person possessing a recorded deed who rents the property to a tenant.
100. An express contract is one that:
a. will execute quickly.
b. must be in writing.
c. is structured in words, delivered in writing or orally.
d. is quickly negotiated.
101. Which of the following is least likely to be true regarding a property that is transferred through
intestate succession?
a. The owner of the property died with no will.
b. The owner of the property died with a will.
c. The property will be transferred through probate court.
d. The property transfer requires court approval.
102. A seller entered into an oral listing agreement to sell real estate with a broker without a follow-
up written verification. The payment of a commission to the broker under these circumstances
is:
a. unenforceable.
b. enforceable.
c. a violation of the regulations of the Real Estate Commissioner.
d. regarded as contrary to public policy.
103. All real estate brokers and sales agents are required to complete hours of
continuing education (CE) every four years to renew their Department of Real Estate
(DRE) license.
a. 15 c. 45
b. 30 d. 50
Simulated Exam #1 181
104. Housing expenses are one of the largest denominators in the Consumer Price Index (CPI)
since:
a. housing is one of the largest expenses for consumers.
b. more people buy homes than buy businesses.
c. CPI is based upon all consumer purchases.
d. housing impacts the economy.
105. Most real estate sales lawsuits are heard in:
a. the court of appeals. c. the state supreme court.
b. small claims court. d. the state superior court.
106. The physical age of a house can be determined best by inspecting:
a. the architectural style. c. the physical condition of the property.
b. the county records. d. the original recorded subdivision map.
107. The primary concern of an appraiser when analyzing property is:
a. supply and demand. c. the neighborhood.
b. functional utility. d. marketability and acceptability.
108. What is contained in all purchase agreements that states the existence or nonexistence of each
broker’s fiduciary agency with the various parties to the transaction?
a. Agency confirmation provision.
b. Broker liability agreement.
c. Attorney fee provision
d. Hold harmless agreement.
109. All of the following is considered ethical behavior, except:
a. A broker who approves of a pocket listing policy among their staff that is done for
personal gain, not to benefit the client.
b. Keeping complete records of all sales and listings.
c. Resolving disputes between brokers through mediation.
d. Disclosing agency relationships to all interested parties.
110. For a salesperson to be given the authority to review purchase agreements and contracts by
their broker, the salesperson granted supervisory powers needs to have:
a. accumulated two full years’ experience within the last five years.
b. accumulated two full years’ experience within the last 10 years.
c. accumulated two full years’ experience as well as two years college education.
d. been employed by the broker for a minimum of two years.
111. A buyer purchased a home without being informed the house was on a septic tank system.
The buyer has the right to:
a. rescind the contract.
b. have the broker disbarred.
c. sue the escrow company for malfeasance.
d. report the seller to the Department of Real Estate (DRE) for failure to disclose.
182 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
112. Why are warranty deeds rarely used in California but commonly used in other states?
a. Warranty deeds are prohibited in California.
b. The buyer may recover treble damages when a grant deed is used.
c. Express covenants in a grant deed run with the land. Covenants in a warranty deed are
personal to one particular buyer.
d. Recourse against a title company under a grant deed is more effective than trying to
collect from the grantor under a warranty deed.
113. Amelia deeds a property to Buster which is never recorded. How would Buster transfer title
back to Amelia?
a. By destroying the deed.
b. By handing the deed back to Amelia as a reconveyance.
c. By writing “cancelled” across the face of the deed and returning it to Amelia.
d. Creating a new deed.
114. A buyer’s agent prepares an offer for a buyer of a home. When is the buyer’s agent to give the
buyer the Agency Law Disclosure form?
a. As soon as practicable.
b. Before showing the buyer the house.
c. Before preparing the offer for the buyer.
d. At opening of escrow.
115. In addition to a general duty owed to the other party in a transaction, a licensee owes a(n)
to act with the utmost good faith and diligence for the benefit of their principal.
a. fiduciary duty c. legislative duty
b. partial duty d. gratuitous duty
116. If a salesperson withholds a new listing from the MLS in an attempt to sell it themselves, it
is called:
a. attempting a secret profit. c. a pocket listing.
b. conversion. d. an illegal withholding.
117. A property was sold netting $410,000 for the seller after a 6% commission was paid. How
much was the property sold for?
a. $434,370. c. $439,180.
b. $386,400. d. $436,170.
118. A fully amortized loan has equal monthly payments. The portion of the payment applied to
principal:
a. goes down each month. c. remains unchanged.
b. goes up each month. d. goes up by equal amounts each month.
119. The person or organization named on a trust deed as the beneficiary is most likely the:
a. trustee. c. lender.
b. borrower. d. buyer.
120. What appraisal license is required to appraise a ten unit apartment building valued at $1
million?
a. Residential license. c. Certified general license.
b. Certified residential license. d. Apartment specialist license.
Simulated Exam #1 183
121. An appraiser was hired by Whitney to appraise DuPont’s property. With whom does the
appraiser discuss their findings?
a. Whitney. c. Any lender interested in the property.
b. DuPont. d. Mr. DuPont’s attorney.
122. California’s energy conservation disclosure requirements require that buyers of newly built
homes receive a disclosure concerning the:
a. type of windows installed.
b. gold star rating assigned to the property.
c. energy consumption of the HVAC unit(s).
d. R-value of insulation used.
123. Why is the replacement cost appraisal approach generally easier to apply to a new property
than an old property?
a. Historic costs are hard to obtain and verify for older properties.
b. It is difficult to value the land on which the property is situated.
c. Depreciation is more difficult to estimate on an older property.
d. Different building codes may have been in effect when an older property was built.
124. A home sold for $300,000. The buyer applied and was approved for a loan with an 80% loan-
to-value ratio (LTV) with a 20% down payment. The property was appraised for $290,000. How
much will the buyer need as a down payment?
a. 20% of $300,000 c. 20% of $290,000 + $10,000
b. 20% of $290,000 d. 20% of $290,000 - $10,000
125. All of the following are essential to the creation of an agency relationship, except:
a. Agreement to pay consideration. c. Consent of the principal.
b. Competency of the principal. d. A fiduciary relationship.
126. When a broker represents only a buyer in the sale of real estate, this is referred to as:
a. single agency. c. dual agency.
b. implied agency. d. general agency.
127. All of the following transactions require the Agency Law Disclosure to be made to all parties,
except:
a. The sale of a commercial building. c. The sale of a residence.
b. The sale of vacant land. d. Lease agreements for less than a year.
128. Agency disclosure is handled in the following sequential steps:
a. disclose, confirm, elect. c. disclose, elect, disclose.
b. confirm, elect, disclose. d. disclose, elect, confirm.
129. What is an example of a real estate advertisement that is clearly misleading?
a. Advertising implying a specific yield different from the stated interest rate.
b. Advertising without stating the sales price.
c. Advertising which includes a map incorrectly indicating the property is close to area
amenities.
d. Advertising which accidentally misspells the broker’s firm name.
184 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
148. Information about the thickness and material used for the foundation footing of a property
are contained in:
a. elevation plans. c. foundation plans.
b. plot plans. d. county records.
149. If a newspaper advertisement for the sale of a condominium states only the annual percentage
rate (APR):
a. the number of payments needs to be included.
b. the down payment amount needs to be included.
c. the total financing charges need to be included.
d. no other disclosures are required.
150. A turnkey project is:
a. construction of a property from groundbreaking to completion.
b. a subdivision whose design has been approved by the local planning commission.
c. a franchise sale.
d. a purchase and resale.
10. b – In the context of representing their client to third persons in a sale, the law of agency exists
for the purpose of clarifying the conduct of an agent when dealing with a third-party for the
benefit of their client.
11. d – The capitalization rate (cap rate) is the annual rate of return on invested capital
experienced by an investment property based on net operating income (NOI) produced by
the operations of an income property. The cap rate is of critical importance to income property
investors. The cap rate is calculated by dividing the NOI by the property’s price.
12. c – Interlineation is the best answer as it refers to the process of modifying boilerplate wording
in a form by inserting additional language between the printed lines. This is improper conduct
when it is performed after the principal has signed the agreement.
13. d – Execution of a contract occurs when it has been completely and fully performed.
14. c – Accession is an addition to property through human efforts or by natural forces. For
example, real property that builds up along a riverbank refers to accession by a natural
occurrence. The other three answer selections are legal actions. While accession allows for
addition by both human and natural forces, accretion is by natural forces only. As with this
question, you will not be required to decide between the two.
15. a – When a metropolitan area grows by the connection of various cities within it, it becomes
a megalopolis.
16. a – A salesperson needs to work under the supervision of a broker. If their employing broker
dies, the salesperson may not conduct licensed activity until a new employing broker is
named.
17. a – Reconciling the appraisal analysis explains how the conclusion of the appraisal report
was reached. The reconciliation will weigh the differences between the various appraisal
approaches used by the appraiser.
18. c – Filtering down is the correct answer. Notice the correct answer has the word “down” in it
just as in the question, which states, “housing passes down.” None of the alternative answer
selections appear to relate to the question.
19. c – As an agent for the buyer, the broker requires no authorization from the seller to accept a
deposit on the purchase of property from the buyer they represent.
20. a – This protected relationship between the client and the agent is called fiduciary. It is a
position of trust that exists between the agent and their client.
21. c – Due to the lack of seller authorization, Broker Chan holds the deposit towards the purchase
price as an agent of the buyer until the offer is accepted by the seller.
22. c – An appraisal is an individual’s opinion of a property’s value on a specific date, documented
in an appraisal report.
23. b – Employment records between a broker and a salesperson need to be kept for three years.
The three year time period begins to run on the termination of the employment.
24. c – Three business days is the time allowed to deposit a client’s check into the broker’s trust
account.
25. a – The only person listed who has a need to know the findings of a structural pest control
report is the buyer.
26. c – Until both the buyer and seller have reached a mutual agreement and a meeting of the
minds, there is no contract, and thus answer selection C. The contract is fully enforceable
is not correct.
188 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
27. d – In a land sales contract, the seller acts as lender and retains title to the property until paid
in full. The relationship most similar to this would be that of the borrower and lender (i.e.,
mortgagor and mortgagee).
28. d – The assignment of a lease does not relieve the lessee (tenant) of responsibility they may
have agreed to under the terms of a lease. Only an assumption of the lease will free the lessee
of an agreed-to obligation.
29. c – Mineral and water rights are transferred with the sale of a property.
30. a – Insulation is designed to avoid the transfer of heat. The higher the insulation’s R factor, the
greater the resistance to heat loss.
31. a – The violation of a condition in a homeowners’ association’s (HOA’s) conditions, covenants
and restrictions (CC&Rs) is considered more serious than a violation of a covenant. The
violation of a condition may result in the loss of title whereas a covenant is simply a promise,
the breaking of which will not result in the loss of title.
32. a – Since Isabella failed to look at the property and determine whether it was occupied, Matt
retains title. Constructive notice requires that the buyer (Isabella) look at the property as
well as the county records.
33. b – In no instance would the listing broker represent only the buyer. A listing broker may
either represent both the buyer and seller (as a dual agent), or just the seller.
34. a – An appraiser determines value of a property rather than its condition, which is performed
by a home inspector. For the purposes of qualifying the collateral which secures the loan, the
lender requires an appraiser’s determination of the property’s value.
35. d – This is a FALSE question. Of the three appraisal approaches to determine a property’s value,
the cost approach will generally produce the highest value and the income approach will
generally produce the lowest. The reason for this is that while the cost approach shows the
actual expense to replace the property, the income approach demonstrates the value based on
the income it generates which is always less. Note that the alternative answer selections may
be useful to remember for other questions.
36. b – To establish whether a property represents adequate security for a loan, the value of the
property needs to be determined by an appraiser.
37. c – Under a California Housing Financing Agency (CalHFA) loan, the CalHFA will make
loan payments for a borrower during a period of unemployment.
38. d – Alienation of title refers to a transfer of ownership.
39. d – A grant deed is signed by the grantor and the records of the proof of identity are kept by
the notary. This is another example of a question that offers potentially useful information
that may be helpful when answering other questions on the state exam.
40. d – For questions regarding marketing, remember this helpful acronym: AIDA. The essential
elements of marketing materials are as follows: attention, interest, desire and action.
41. c – A blind ad is marketing material that fails to alert the reader to the fact that the advertisement
was placed by a licensed real estate agent or broker.
42. d – Confidentiality has no time limit. Any such confidential financial information needs to be
kept secret for perpetuity.
43. c – The failure to deliver a copy of any signed document is a violation of agency law that
may warrant disciplinary action by the Department of Real Estate (DRE). However, the signed
listing contract is still valid and enforceable against the seller.
Simulated Exam #1 189
44. a – The agent is obligated to inform the client of all material facts. The form of the deposit is
a material fact. An agent needs to present all offers unless they are patently frivolous or the
seller explicitly instructed the agent to no longer present offers.
45. a – A debt incurred primarily for personal, family, or household purposes and secured by
a parcel of real estate containing one-to-four residential units is known as a consumer
mortgage.
46. b – Both answer selection A and C are formal declarations that require an oath. Only an
affirmation stops short of the oath.
47. d – This is an EXCEPT question. An oral contract may be valid, and thus D. written
documentation is the correct answer. A valid contract requires four elements be present:
capable parties, consideration, legal object and mutual consent.
48. c – Since the grantor was under the age of 18 and therefore not legally capable, the deed is void.
Another question in this simulated exam mentions that capable parties are an essential
element to the formation of a valid contract.
49. a – Any changes to a contract voids the original contract. Thus, in order to be binding, both
principals need to agree to and sign the contract without changes.
50. d – Boot refers to any consideration in a §1031 exchange of an unlike kind. Once again, the
answer choices offer the reader important information regarding the subject of this and related
questions.
51. a – A conspiracy such as the one described in this question is a clear violation of antitrust laws.
These laws are designed to prevent the formation of monopolies and encourage competition
in the market.
52. c – “Like-kind” in the context of a §1031 exchange refers to the purpose for holding the property
— i.e., the replacement property will be used for a similar purpose as the subject property. So
long as the purpose is the same, the physical variations of the real estate are of no importance.
53. c – The quantity of accrued depreciation becomes increasingly difficult as buildings get older,
and causes the cost approach to lose its validity. Under the cost approach of appraisal, an
appraiser arrives at a property’s value based on the present cost of constructing the present
improvements and acquisition of the land.
54. a – This is a LEAST question. A medical building is the least impacted by changed economic
conditions. The tenants of a medical building are generally under long-term leases where
no rent is charged based on the volume of receipts, as occurs under a percentage lease.
Alternatively, automobile sales decline and fast food restaurants may see a rise in volume
during recession.
55. d – This is an EXCEPT question. Appraisals state factual data about the property and
surrounding area, not the financial and loan data.
56. a – The word “residual” refers to that which is left after subtracting other values. In a land
residual appraisal, the cost of the building is subtracted from the property value to determine
the value of the raw land.
57. b – Disclosure is the necessary action as it provides the client the opportunity to select a
different appraiser if they feel the appraiser’s interest in the property is too significant, even
after the appraiser accepts the assignment. Here, the choice of whether to retain the appraiser
is left to the client.
58. d – The due-on clause accelerates the payoff of the loan. Only answer choice A also pertains
to loans, but it allows a new loan to become senior to an existing mortgage.
190 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
77. c – Closing costs are charges related to the transaction that are paid through escrow. The
CalVet Home Loan is a land sales contract and is therefore different from each of the other
answer choices. There are no loan charges in this arrangement and thus the escrow charges
are lower.
78. d – This question illustrates the need to select the best answer available. The correct term for
what the bank has required is a compensating balance – leaving enough money with the
bank to offset potential foreclosure costs. It can also be said to improve the yield and reduce
the lender’s risk.
79. a – The questions states the agent is acting as a buyer’s agent. Therefore, only answer choice A
fulfills this description. Agency duty has nothing to do with advance fees.
80. b – The Statute of Limitations allows a three-year period after the alleged violation for the
Real Estate Commissioner to initiate an action against a licensee, except in the case of fraud
where the limit is three years from the occurrence or one year of the discovery.
81. c – Neither the Real Estate Commissioner nor the federal Department of Housing and Urban
Development (HUD) have a direct concern with local sewage management. Further, there is
no state sewage department. Thus, by elimination, that leaves only answer selection C. local
health department.
82. c – A condition precedent is a provision in an agreement calling for the occurrence of an
event or performance of an act before title is transferred.
83. d – In order to represent both principals in a transaction as a dual agent, the agent’s dual
agency status must be disclosed as soon as possible.
84. a – There are several disclosures that became effective around the late 1980s. However,
the agency disclosure law is the one that became effective in 1988. The Transfer Disclosure
Statement (TDS) became effective in 1987.
85. c – Cost basis is the cost incurred to acquire and improve property and is used primarily for tax
reporting and recovery of capital. Loans have no effect on a property’s cost basis, and neither
does a seller’s list price.
86. b – The order of events in a court proceeding are as follows: the attachment of the property
though a lis pendens to ensure its availability if a judgment is awarded. Then, after judgment
has been made, it is executed.
87. c – If the Real Estate Commissioner feels the need to retract approval of a subdivision, they
issue a desist and refrain order. There are two laws that relate to subdivisions: the Subdivision
Map Act, which is handled locally through the Planning Department, and the Subdivided
Lands Law, which is handled by the Department of Real Estate (DRE).
88. c – The broker may authorize any employee to be responsible for trust fund withdraws.
89. d – A property manager’s compensation may take several forms. However, kickbacks from
suppliers or service companies are unethical as those savings rightfully belong to the client.
90. a – Only answer choice A fulfills all the requirements of an enforceable contract. Not all
contracts are written. However, all contracts require consideration, mutual consent and
legally competent participants.
91. d – Internet advertising by its nature opens the market to an international audience. While
the broker need not be sufficiently computer literate to implement the advertising, they do
need to properly supervise that which is done in their name by their licensed agents and
unlicensed staff.
192 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
92. d – Only the employing broker can compensate the salesperson. The broker receives their
broker fee (commission) at the close of escrow and delivers a percentage of the fee to the
salesperson involved in the transaction.
93. d – This question provides a good opportunity to recognize unnecessary or improper disclosures.
94. b – If a broker has already communicated false information to the buyer that was not known
to the broker to be incorrect, they need to clarify the information with the buyer once they
discover its inaccuracy. Informing the seller will not resolve the earlier misinformation given
to the buyer and the escrow officer is not the person who is duty bound to pass along the
corrected information to the buyer.
95. a – The only correct interpretation of agency law is that broker Paulson acted outside his
authority and revealed private financial information that may or may not have been true
without client permission. The alternative answer selections may have a ring of truth, but the
state exam is concerned with legal issues.
96. d – The Agency Law Disclosure is only required on transactions involving a licensed agent
and is delivered to all parties in targeted transactions.
97. d – An appraisal report is a snapshot of property and local market conditions. Therefore, an
appraisal is only valid on the date stated in the report. As conditions and the market change,
an appraisal becomes invalid.
98. d – A more complete answer might say “delivery and acceptance” of a deed. However, given
the choices offered, only D. Delivery of a valid deed is acceptable.
99. a – The question speaks to constructive notice. Answer selection A refers to a quitclaim deed
that is not recorded nor does the person occupy the property. Recording documents as well
as physical possession of a property are both cause for someone to recognize and question an
interest in property.
100. c – An express contract represents a mutual agreement between real estate participants. An
express contract can be oral or in writing.
101. b – Intestate means a property owner dies with no will. Under such conditions, the transfer
generally requires a court approved transfer through probate court, unless a revocable transfer
on death deed has been recorded.
102. a – The only issue regarding an oral listing is that it fails the conditions of Statute of Frauds
which requires the listing to be in writing to be enforceable. As such, the broker’s fee is
unenforceable in a court action.
103. c – A licensee needs to complete 45 hours of continuing education every four years. Notice
that this question contains an answer to another state question regarding how often a license
needs to be renewed – every four years.
104. a – The answer is part of the question. Housing is the largest single expense for most consumers.
105. d – The state superior court is where most real estate lawsuits are heard. Generally real estate
cases are too large for a small claims court to settle. The court of appeals and the state supreme
court will only hear those cases not settled by a lower court.
106. b – County records are clearly the most accurate way to determine the physical age of a
house.
Consider the alternatives — architectural style is generally not grounded exclusively in a
specific period of time, the condition of a property reflects effective age but not necessarily
its physical age if it is adequately maintained, and subdivision recording only applies if the
home was immediately built.
Simulated Exam #1 193
107. d – The best answer is selection D. marketability and acceptability. Each of the alternative
answer selections may play a part in the decision of an appraiser analyzing a property.
108. a – The agency confirmation provision discloses the agency of each broker in the
transaction and is contained in all purchase agreements and counteroffers.
109. a –This is a NOT question. The pocket listing is inappropriate since, for the agent’s personal
gain, the property is not being exposed in the multiple listing service (MLS). The alternative
answer selections are all positive ethical decisions, and thus cannot be correct. If the NOT in the
question was missed, it may be difficult to choose between the remaining incorrect answers.
110. a – This is a required experience question. For a salesperson to be given the authority to review
documents by their broker, they need to have accumulated two full years’ experience within
the last five years. This is true for broker licensees as well.
111. a – Only answer selection A. rescind the agreement is appropriate. This is an excellent
example of arriving at the correct answer by eliminating the incorrect answer choices. Choice
D fails since the seller doesn’t answer to the Real Estate commissioner. Choice C fails since
the escrow officer is not responsible for disclosures. Choice B fails since most brokers are not
members of the State Bar.
112. d – A warranty deed places the liability on the grantor rather than a title company. It is often
difficult to find the seller after the escrow has closed. To sue and hope for a judgment against
the seller is impractical.
113. d – A deed becomes valid once it is delivered. To transfer a property to another individual or
back to the previous owner, a new deed is to be executed and delivered. Failure to do so may
render the ownership ambiguous and create a cloud on title.
114. a – The three steps in the creation of an agency relationship are to first disclose, then elect who
is represented, then confirm that decision. Disclosure is to be made as soon as practicable.
115. a – The agent’s duty to their client is a fiduciary duty.
116. c – A pocket listing is the withholding of a listing from the multiple listing service (MLS) for
the agent’s personal gain. This violates the fiduciary duty owed to the client since it limits the
property’s exposure on the market.
117. d – This is an example of a simple math problem that requires calculation since only answer
selection B is clearly wrong. The equation is: $410,000 = 94% of X. 410,000/94 = 4,361.70. Then
4,361.70 x 100 = $436,170.
118. b – With a fully amortized mortgage, the interest expense is subtracted from the payment first.
As a portion of principal is paid each month, the loan balance is reduced and therefore the
interest portion of the payment goes down. This in turn causes the principal portion to rise.
119. c – The beneficiary on a trust deed is the lender, i.e., the holder of a note secured by a trust
deed that is entitled to the performance of the provisions in the trust deed. In the context of a
mortgage, this is the mortgagee.
120. c – There are four levels of appraisal licenses. Anything other than a one-to-four unit residential
property requires a certified general appraiser license.
121. a – An appraiser can ethically share the contents with an appraisal report with the client or
anyone named by the client, a peer review committee and a court of law.
122. d – The rating of the insulation installed in a property needs to be disclosed to buyers of newly
built homes. The alternative items can be visually observed by the buyer.
194 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
123. c – A new property requires no adjustment for depreciation. Under the replacement cost
approach, the appraiser determines the dollar amount required to replace an improvement at
its current cost. As the property ages, the depreciation is greater. The effective age of a property,
which is what depreciation is based on, is affected by remodeling and maintenance variations
unique to each property. Thus, the replacement cost appraisal approach is generally easier to
apply to a new property than an old property.
124. c – The $300,000 selling price remains the same regardless of how the down payment is
calculated. So with the appraisal at $290,000, the buyer will need 20% of this value. Presuming
the sales price is not adjusted, the buyer will need to also place the difference between the
sales price and the appraisal ($10,000) as part of the down payment.
ORIGINALS NEW ARRANGEMENT
$240,000 LOAN $232,000
$60,000 DN. PYMT $68,000
$300,000 TOTAL $3000,000
125. a – This is a NOT question. Agency is not necessarily a matter of compensation. The agency
relationship between a client and agent exists whether or not the transaction closes and the
agent receives a fee.
126. a – An agent may only be a single agent (representing one party in a transaction) or a dual
agent (representing both parties in a transaction). As the broker in this question represents
only a buyer, the broker is a single agent.
127. d – The Agency Law Disclosure is not required for leases of less than one year.
128. d – The agency relationship options are first disclosed. Then the agent elects what the
relationship will be and finally confirms that choice with all participants involved in the
transaction.
129. c – Maps and real estate advertisements that show close proximity to favorable amenities or a
greater distance from unfavorable elements are misleading.
130. b – A deed restriction can prohibit religious use of a property but not discriminate against
minorities or females.
131. a – An “as is” defense by the seller requires full disclosure of all material facts known about a
property. “As is” is not synonymous with “no disclosure required.”
132. c – Wainscoting is a traditional style of wall covering in which a chair rail divides the lower
portion of the wall from the upper portion which is generally of a different material.
133. d – Monies advanced to the broker for future marketing costs needs to be accounted to the
seller.
134. c – The election of an agency role needs to be chosen as soon as possible and then confirmed
with all participants.
135. c – An individual who has been delegated agency duties by the primary agent of the client,
not the client themselves, is a subagent. For example, when another broker acts on behalf of
a seller at the request of the seller’s broker, a subagency with the seller has been established
by the brokers.
136. b – The misleading nature of the undisclosed factor rises to the level of unlawful conduct as it
places the seller in a position in which they can neither sell the property to someone else nor
complete the accepted transaction. As with puffing, it is the belief and trust bestowed by the
principal that causes the act to move beyond a matter of ethics and become unlawful.
Simulated Exam #1 195
137. a – Before a broker may solicit, advertise for and agree to receive an advance fee, the
paperwork material is to be submitted to the Commissioner of the Department of Real Estate
(DRE) for approval at least 10 calendar days prior to use.
138. c – This is a NOT question. Estoppel – the principle that prevents a person from asserting
something contrary to what is implied by previous actions or statements – will not terminate
the relationship. Each of the alternative answer selections will terminate an agency
relationship.
139. d – This is a NOT question. Trade fixtures belong to a commercial tenant and are to be
removed at the end of their tenancy, and thus are not an appurtenance. Appurtenances run
with the land and are transferred with it on its sale.
140. a – In this question, the park is built within a specific neighborhood. If an assessment is made
for the cost to build and/or maintain the park, it would apply to just the owners of property in
that neighborhood as a special assessment.
141. c – Answer choice C is correct since debt and equity funds are forms of real estate investments.
Answer choices A and B may represent the benefits of real estate investments, but are not real
estate investments themselves.
142. a – The price paid for a property establishes what the commission due to the broker will be.
143. c – There are several principles to real estate value. The principle of conformity holds that
the maximum value is realized when a reasonable degree of homogeneity of improvements is
present. Use conformity is desirable, creating and maintaining higher values.
144. d – In a condominium complex, an individual owner owns their own condo as well as a
proportional share of all common areas. They can own both in fee title.
145. a – This is a LEAST question. The original price or value of anything is of little concern when
determining its present value. Thus, the original cost of a residence is not of importance when
conducting an appraisal.
146. b – The issue raised by this question is one of disclosure. Prizes and gifts are allowable so long
as there is a full disclosure of all the terms and conditions associated with the promotional
event.
147. b – Avulsion is the sudden loss (or addition) of land through natural forces. Accretion is
the gradual addition to property through the accumulation of layers of soil. Reliction is the
gaining of land area.
148. c – The foundation plans speak to questions related to the building foundation in the same
manner that a framing plan illustrates the framing of a property.
149. d – The annual percentage rate (APR) may stand alone as financial information without
providing additional financial information in a newspaper advertisement.
150. a – The term “turnkey” implies a property is complete and ready for immediate occupancy,
requiring nothing more of the property to fulfill its intended purpose.
Notes:
Simulated Exam #2 197
SIMULATED EXAM #2
1. The property taxes for a condominium unit are paid by the:
a. board of governors. c. owner of the condominium.
b. homeowners’ association (HOA). d. subdividers who constructed the
property.
2. All of the following actions constitute constructive eviction under a lease, except:
a. The owner fails to make necessary repairs to the property.
b. The owner makes extensive and unnecessary changes to the building, making it no
longer usable for its original purpose.
c. The owner shows the property to a new prospective tenant and enters into lease
negotiations with the new tenant.
d. The owner evicts the tenant after proper service of a Three-day Notice to Quit.
3. What are the three steps of the agency disclosure in proper chronological order?
a. Elect, confirm, disclose. c. Disclose, confirm, disclose.
b. Confirm, elect, disclose d. Disclose, elect, confirm.
4. A broker who simultaneously represents the best interests of both opposing parties in a
transaction is known as a(n):
a. finder. c. subagent.
b. dual agent. d. unlawful agent.
5. Barnard made an offer to buy a vacant residence. The offer was accepted by the seller. Prior to
the close of escrow, Barnard requested permission from the broker to enter and make minor
repairs to the house. Which of the following is true?
a. The broker is to get a signed rental agreement from Barnard before allowing him to
enter.
b. Barnard doesn’t need permission from anyone since he is the equitable owner of the
property.
c. The broker needs to get the seller’s permission.
d. Bernard may only enter to conduct repairs that correct material defects in the property.
6. Broker Sarah delivered an offer to purchase real property to Owner Martha. Owner Martha
asked for 24 hours to consider the offer. Later that same day, Broker Sarah received two
additional offers through other brokers. Broker Sarah believes the owner will reject all three
offers. In order to comply with the law, Broker Sarah is to:
a. hold the new offers until Owner Martha has made a decision on the first offer, then
present the other offers.
b. present the two additional offers in the order they arrived.
c. simultaneously present the two additional offers to Owner Martha as soon as possible.
d. refuse to receive the offers until Owner Martha decides not to accept the original offer.
7. What contributes to the value of a well planned neighborhood versus a poorly planned
neighborhood?
a. Nonconforming improvements. c. Improper orientation.
b. Inconsistent improvements. d. Conformity of size and style.
198 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
8. An appraiser views the addition of an amenity to an apartment building under which appraisal
principle?
a. Substitution. c. Anticipation.
b. Contribution. d. Progression.
9. What type of depreciation is the most challenging to correct?
a. Functional. c. Physical.
b. Economic obsolescence. d. Wear and tear.
10. Return of an investor’s investment is provided for through:
a. sinking funds. c. a reserve for replacement.
b. depreciation. d. profit.
11. The maximum number of properties that can be covered by a trust deed without a blanket
encumbrance is:
a. three. c. one.
b. two. d. there is no limit.
12. Heather, a single mother, is able to get down payment assistance as well as a below market rate
of interest on her mortgage. What type of mortgage did she receive?
a. CalVET.
b. U.S. Department of Veterans Affairs (VA)-guaranteed loan.
c. Federal Housing Administration (FHA)-insured loan.
d. California Housing Financing Agency (CalHFA).
13. Deficiency judgments can only be granted when:
a. a property has been judicially foreclosed.
b. the value of the property equals or exceeds the underlying balance due on the loan.
c. the mortgage is classified as a purchase-money mortgage.
d. a property has been foreclosed under a trustee’s sale.
14. Sally applied for a real estate loan. The lender can lawfully require her to answer questions in
regards to her:
a. marital status. c. gender.
b. race. d. income.
15. A husband nominates his wife to manage his will. Thus, she will function as an:
a. executrix. c. administrator.
b. administratrix. d. executor.
16. If a buyer and seller decide to rescind a deal after the deed has been recorded, the buyer is to:
a. record a deed of reconveyance.
b. return the deed to the seller in exchange for consideration.
c. record a cancellation of the transaction.
d. provide a new grant deed to the seller.
17. Broker fees deposited with the broker before they are earned are called:
a. kickbacks. c. referral fees.
b. advance fees. d. duplicate charges.
Simulated Exam #2 199
27. All of the following make a contract voidable if present at its formation, except:
a. Fraud. c. Undue influence.
b. Duress. d. Illegal purpose.
28. If a lease requires the tenant to pay certain expenses such as taxes, maintenance or insurance
in addition to the rent, the lease is classified as a(n):
a. gross lease. c. percentage lease.
b. net lease. d. estate for will.
29. When rent is computed based on the gross sales of a business occupying the property, the lease
is classified as a(n):
a. valid lease. c. net lease.
b. voidable lease. d. percentage lease.
30. On which type of listing contract is a broker required to state the amount of their commission
is negotiable and not fixed by law?
a. Multi-family residential listing agreements.
b. Retail commercial center listing agreements.
c. Single-use industrial property listing agreements.
d. One-to-four unit residential property listing agreements.
31. If a 16-year-old emancipated minor wishes to sell real property, their broker may:
a. not accept the listing.
b. accept the listing.
c. accept the listing only with a guarantee from an adult.
d. accept the listing, but it will be voidable.
32. If a strip of land is washed away by flood, this action is known as:
a. alluvium. c. avulsion.
b. accretion. d. reversion.
33. Which of these is a direct building cost?
a. Building permits. c. Lumber.
b. Finance charges. d. Legal services.
34. A residence that has 6” x 6” posts set four feet apart instead of 2” x 4” studs is an example of
construction.
a. post and beam c. Native American
b. modular d. unsafe
35. All of the following are soil conditions, except:
a. Alkaline. c. Deciduous.
b. Adobe. d. Expansive.
36. What is a “gore”?
a. A triangular shaped parcel of land.
b. A parcel that cannot be developed.
c. Stigmatized property on which a murder was committed.
d. Damaged property.
Simulated Exam #2 201
37. A broker provides services to both a buyer and a seller in a transaction without disclosing their
dual agency status. This is an example of:
a. deniable agency. c. voidable agency.
b. ostensible agency. d. ratified agency.
38. All of the following actions create an agency relationship, except:
a. Subornation. c. Ratification.
b. Implication. d. A verbal agreement.
39. A listing broker sells an office building to a syndicate of which the broker is a member without
informing the seller of this interest. Before closing, the seller discovers the broker’s interest and
refuses to sell. What would happen in a civil suit to collect a commission?
a. The case would be transferred to the Real Estate Commissioner.
b. No commission would be due.
c. The broker would be awarded their full commission.
d. The court would demand a mitigation hearing.
40. All of the following are legal activities for a broker under agency law, except:
a. Accepting commissions from both the buyer and the seller.
b. Acting as an escrow.
c. Selling their own property without disclosing their license status.
d. Depositing additional personal funds into a client’s trust account.
41. An agency relationship in real estate is terminated in multiple ways. All of the following are
likely to be the cause of termination of an agency relationship, except:
a. The incapacity or death of either the seller or broker.
b. Revocation of the agency by the owner.
c. Destruction of the property.
d. Estoppel.
42. A broker who fails to promptly disclose their dual agency status is subject to:
a. a $10,000 penalty.
b. liability for their clients’ money losses.
c. disciplinary action by the Internal Revenue Service (IRS).
d. frequent auditing by the Federal Bureau of Investigation (FBI).
43. In which appraisal approach to value would the value for the land be calculated separately?
a. Capitalization. c. Market comparison.
b. Gross rent multiplier. d. Cost.
44. To determine the accrued depreciation for a property, a buyer’s best resource is a(n):
a. county recorder representative. c. appraiser.
b. accountant. d. real estate broker.
45. An important economic factor in real estate is:
a. its beneficial use. c. its permanence.
b. whether the property is mobile or d. the size of the structure.
immobile.
46. A lender must notify a borrower when a final/balloon payment is due:
a. 90 to 150 days prior to the due date. c. four weeks prior to the due date.
b. 30 to 90 days prior to the due date. d. six months prior to the due date.
202 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
57. Before soliciting business for a brokerage office operating under a fictitious business name, the
broker is not required to:
a. record the fictitious name with the recorder’s office in the county where their main
office is located.
b. publish the “doing business as” (DBA) in a newspaper of general circulation.
c. have a broker’s license issued by the Department of Real Estate (DRE) with that
name.
d. publish an office policy manual under the fictitious business name.
58. Appraiser licensing in California is controlled by what entity?
a. The Department of Real Estate (DRE).
b. The California Bureau of Real Estate Appraisers (CalBREA).
c. The Department of Business Oversight (DBO).
d. The California Department of Insurance (CDI).
59. When an agent modifies a document after it is signed by the one or both of the parties, this is
referred to as:
a. correction. c. notarization.
b. defacing. d. amanuensis.
60. A broker receives a full price offer on a house they are listing. Before they present the offer to
the seller, another broker brings in an all cash offer for $5,000 less. The listing broker is to:
a. present both offers at the same time.
b. refuse to present the second offer.
c. tell the other broker the property has been sold.
d. present the first offer in the morning and the second offer in the evening.
61. A prospective buyer gave their broker a personal check for $1,000 payable to the seller along
with an offer to buy the property. The buyer told the broker the check was not to be cashed
until the end of the month. Which of the following is correct?
a. The broker is to refuse to accept the check.
b. The broker is to accept the check, but deposit into their trust account within 24 hours.
c. The broker needs to deliver the check either to the seller or escrow upon acceptance.
d. The broker may hold the check, but needs to tell the seller it is being held uncashed
before the seller accepts the offer.
62. When comparing a small house with a large house of similar quality, which of the following
is true?
a. A small house costs more per square foot.
b. A large house costs more per square foot.
c. Large homes sell better.
d. Size doesn’t matter.
63. When a comparable sale used in an appraisal was not an arm’s length transaction, this affects
the:
a. demand for the subject property.
b. value of the subject property.
c. highest and best use of the subject property.
d. scarcity of the subject property.
204 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
64. While appraising a single family residence (SFR), an appraiser observes cracks in the walls and
floor. In response, the appraiser best recommends which of the following?
a. A structural pest control report. c. An environmental impact report (EIR).
b. A soil engineer’s report. d. A home warranty policy.
65. All of the following are one of the four important elements of value, except:
a. transferability. c. utility.
b. appreciation. d. demand.
66. A trustor is not considered to be in default when they:
a. fail to upgrade their property in anticipation of future trends.
b. commit waste to a property.
c. are delinquent in their property taxes.
d. fail to maintain property insurance.
67. The maker of a negotiable instrument is able to defend against a holder in due course in the
event of:
a. forgery. c. Both a. and b.
b. incapacity. d. Neither a. nor b.
68. If there is no specific closing date named in the escrow instructions, escrow is to close:
a. within a reasonable period of time. c. within 60 days.
b. within 30 days. d. within 90 days.
69. The closing statements the buyer and seller get from escrow:
a. are always different from one another. c. are always identical to one another.
b. are acknowledged before a notary public. d. are approved by the title company.
70. Department of Housing and Urban Development (HUD) advertising guidelines are violated
by which of these phrases:
a. “seeking a female roommate.” c. “retiree’s dream home.”
b. “good neighborhood.” d. “great location.”
71. All of the following an applicant needs in order to be eligible for a California real estate agent
license, except:
a. pass the qualifying state licensing exam.
b. be honest and truthful.
c. be at least 18 years old.
d. have at least two years of real estate-related experience.
72. A buyer of a single family residence (SFR) is entitled to certification for all of the following,
except:
a. the home is in compliance with smoke detector laws.
b. the home has properly functioning solar panels installed on the roof.
c. the home is in compliance with carbon monoxide gas detector laws.
d. the water heater is properly braced, anchored or strapped.
Simulated Exam #2 205
73. A seller’s broker receives and presents a purchase offer that is accepted by the seller. The seller
then requests the broker give them the buyer’s deposit check. The broker needs to:
a. first deposit the check into the broker’s trust account before giving the deposit funds to
the seller.
b. write a counteroffer requesting the release of the deposit funds to the seller.
c. obtain the written consent of the buyer before releasing the check to the seller.
d. obtain written acknowledgement from the seller they have received the funds.
74. When a real estate licensee misrepresents a property to a buyer, they are least likely to be
subject to:
a. disciplinary action by the California Secretary of State (SOS).
b. civil action.
c. criminal action.
d. disciplinary action by the Department of Real Estate (DRE).
75. Negative physical elements of a property such as mold are disclosed in the:
a. Transfer Disclosure Statement (TDS). c. advertisements referencing the property.
b. listing agreement. d. preliminary title report.
76. A subdivider needs to give a copy of the Real Estate Commissioner’s public report to:
a. anyone who is likely purchase one or more lots.
b. anyone upon request.
c. only bona fide purchasers who have signed a purchase contract.
d. the salespeople they employ.
77. When a broker wants to store documents electronically, the storage method may not allow the
final documents to be altered. What method of electronic document storage is required by the
Department of Real Estate (DRE)?
a. Disc Operating System (DOS).
b. Save Now, Always and Keep Electronic (SNAKE).
c. Write Once Read Many (WORM).
d. Random Access Memory (RAM).
78. When taking a listing, it is appropriate for the broker to:
a. take the listing at whatever price the owner requires without discussion.
b. raise the owner’s asking price to include the commission and an additional amount for
negotiation.
c. take a listing at a price that is significantly higher than that suggested by a competitor.
d. ask questions to determine the seller’s reason for listing.
79. Brokerage fee provisions which may be included in a seller’s exclusive right to sell listing
agreement include:
a. a fee on any sale provision. c. a safety clause.
b. a termination provision. d. Any of the above.
80. A broker’s fiduciary obligation to protect a seller’s confidential information continues:
a. after the term of the listing agreement. c. until the close of escrow.
b. for the term of the listing agreement. d. for two years after the close of escrow.
206 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
81. The sale of real estate under a conditional installment sale gives the buyer (vendee):
a. possession of the property. c. an estate of inheritance.
b. a freehold estate. d. an estate for years.
82. A listing contract contains a clause stating that the seller agrees to pay a commission in
exchange for the broker’s agreement to use diligence in procuring a buyer. This clause:
a. is redundant and unenforceable.
b. is necessary for the creation of a unilateral contract.
c. is important for the creation of a bilateral contract.
d. requires the broker to advertise the property in numerous formats.
83. For a buyer’s broker to have the ability to negotiate their fee, the buyer’s broker needs to enter
into an employment agreement with their buyer, called a(n):
a. buyer’s listing. c. cooperating broker arrangement.
b. affiliated business arrangement. d. controlled business arrangement.
84. A landlord is required to provide a copy of the written lease to the tenant within:
a. one week. c. ten business days.
b. ten calendar days. d. 15 calendar days.
85. An individual unit in a multi-story rental apartment complex that occupies only one floor is
known as a(n):
a. penthouse. c. flat.
b. studio. d. duplex.
86. Which of the following pieces of lumber contains exactly one board foot?
a. 6” x 2” x 12” c. 6” x 6” x 6”
b. 6” x 1” x 12” d. 6” x 1 ft. x 1 ft.
87. Blake sold his home to Frank but remained in possession and negotiated a two-year leaseback.
Frank did not record the deed. During this two-year period, Blake sold the home to Sam who
then recorded the deed. Who owns the home?
a. Sam, because he recorded his deed.
b. Blake, because he still has possession of the property.
c. Blake, because both sales were fraudulent.
d. Frank, because he received the first deed.
88. Real estate investments are generally funded through a combination of:
a. mortgage and investor funds.
b. the supply and demand of investor funds.
c. liquid and non-liquid investment funds.
d. guaranteed returns and speculative investments.
89. A commercial development consisting of a single line of store-fronts constructed along a busy
thoroughfare is described as a(n):
a. neighborhood center. c. strip commercial building.
b. small mall. d. big box store.
90. Property is best defined as:
a. things which buyers and sellers own.
b. only real property.
c. rights or interests which a person has in the thing owned.
d. only personal property.
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91. Conrad wills the family estate to his first son Michael with the provision that if Michael were
to divorce in the future, title will pass to Conrad’s second son, Bret. This is an example of a(n):
a. covenant. c. condition precedent.
b. restriction. d. condition subsequent.
92. A property owner has been doing car repairs on their driveway in violation of the conditions,
covenants and restrictions (CC&Rs) of their subdivision. The homeowners’ association (HOA)
files a lawsuit and receives a court order requiring the owner to stop. The court order is called
a(n):
a. attachment lien. c. injunction.
b. lis pendens d. mechanic’s lien.
93. A seller of property tells their broker the house is connected to the sewer. The broker relays this
information to a buyer, who later finds that the house has a septic system in need of repair. The
buyer would sue:
a. the broker and the seller. c. the broker only.
b. no one, as they should have checked. d. the owner only.
94. A broker acting as an agent for a principal has as much authority as:
a. the principal actually or ostensibly confers upon them.
b. an attorney-in-fact.
c. the broker chooses to take.
d. they choose to accept as limited by the statute of frauds.
95. A real estate agent is obligated to communicate any offer to the principal:
a. unless the offer is patently frivolous or the agent is acting on written instructions of
their seller.
b. only if it is in writing.
c. whether the offer is verbal or written until the agency is terminated.
d. unless the offer is terminated.
96. All of the following statements are true concerning an in-house sale, except:
a. the listing broker can buy the property themselves.
b. the listing broker can act as an agent for the seller only.
c. the listing broker can act as an agent for the buyer only.
d. the listing broker can act as a dual agent.
97. When showing a listed property to potential buyers, the listing broker is required to disclose:
a. all known material facts about the property.
b. anything they have been authorized by the seller to disclose.
c. any facts about the seller’s motivation that might induce the buyer to make an offer.
d. anything that comes to mind at the time.
98. Before closing, a buyer asks their broker for permission to enter the vacant house they will be
purchasing in order to paint the kitchen. The broker is to:
a. seek approval from the seller.
b. ask the buyer to deposit the balance of the down payment into escrow first.
c. give the buyer access and approval but supervise their entry.
d. refuse to give the buyer access and approval.
208 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
99. “Agency” includes relationships between licensed sales agents and their brokers and:
a. brokers and members of the public. c. escrow officers.
b. finders and their brokers or principals. d. Both a. and b.
100. All of the following terminate an agency relationship, except:
a. Destruction of the subject property.
b. Death or incapacity of the agent or principal.
c. Refusal to perform by the agent or principal.
d. Completion of the purpose of the employment.
101. A lessee rents an apartment from May 1st to July 1st of the same year. The lessee’s tenancy is
thus classified as a(n):
a. periodic tenancy. c. estate at will.
b. estate at sufferance. d. estate for years.
102. A gross lease is least likely to be found in:
a. condo rentals. c. motels.
b. vacation properties. d. retail spaces.
103. All of the following substances need to be referenced in a statement disclosing the presence
of various environmental hazards, except:
a. Asbestos. c. Radon gas.
b. Smoke detectors. d. Lead-based paint.
104. A seller is required to deliver earthquake safety guides to buyers of most masonry buildings
with wood frame floors or roofs built prior to:
a. 2000. c. 1980.
b. 1990. d. 1975.
105. A real estate salesperson employed as an independent contractor:
a. passes no liability for their actions on to their employing broker.
b. does not need to be supervised by the broker.
c. needs to pay income taxes and social security taxes.
d. is not eligible for workers’ compensation insurance coverage.
106. Any individual may contact the Real Estate Commissioner to:
a. determine commission rates allowable by law.
b. negotiate a settlement dispute between principals.
c. report fraud by a real estate licensee.
d. determine the zoning regulations which pertain to their property.
107. In a deed, the clause that defines the nature of the estate being granted is the:
a. seisin. c. subrogation.
b. habendum. d. due on.
108. Under the , an employer may not discriminate against a disabled person who
seeks employment due to that person’s disability.
a. Americans with Disabilities Act (ADA)
b. Civil Rights Acts of 1866 and 1870
c. Home Affordable Modification Program (HAMP)
d. Unruh Law
Simulated Exam #2 209
117. In a §1031 exchange, a person is most likely to be taxed for a gain when:
a. giving cash boot. c. trading down.
b. trading up. d. trading residential apartments for
commercial property.
118. After escrow instructions have been signed, the seller asks escrow to return the grant deed to
them so they can have an attorney check it. What is the result of this activity?
a. The return of the deed constitutes a rescission of the contract by the seller.
b. The escrow officer needs to return the deed if so instructed by one of the principals.
c. Escrow needs to close promptly before the attorney gets a chance to review the deed.
d. The escrow officer cannot return the deed based on the seller’s request.
119. An agent needs to disclose a conflict of interest to the affected parties when a principal or
service provider in the transaction is the agent’s:
a. relative or relative of a fellow employee.
b. employee or fellow employee.
c. brother or sister.
d. Any of the above.
120. The annual percentage yield (APY) applies to:
a. savings accounts. c. escrow instructions.
b. appraisal reports. d. title insurance policies.
121. Who generally benefits the most from an assignment of rent clause contained in a trust deed?
a. The trustor. c. The beneficiary.
b. The trustee. d. The purchaser.
122. Consider a prepaid rental listing service that intends to relocate. When is the listing service
required to provide notice of the new address and telephone number to its clients?
a. As soon as practicable after the listing service gets settled in its new location.
b. No later than seven calendar days after the move has occurred.
c. Before the move is to occur.
d. 60 days prior to the move.
123. A broker repeats information they received from their seller to a potential buyer. On finding
the information is false, the broker is to:
a. inform the seller of the error.
b. inform the buyer of the error.
c. inform the escrow officer of the error.
d. make a note of the misrepresentation in the client file.
124. A plot plan is drawn by an architect to show:
a. the materials the subcontractors used to construct the property.
b. elevations and soil quality.
c. when construction is scheduled to begin.
d. the placement of construction and related land improvements.
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134. The appraisal process which allocates a percentage of a property’s total value to the land and
a percentage to the improvements is known as:
a. the ratio of total value to site value. c. Both a. and b.
b. the allocation approach. d. Neither a. nor b.
135. A capital improvement to real property will always:
a. increase the book value of the property by the amount the appraised value is increased.
b. increase the book value of the property by the cost of the improvement.
c. increase the property’s market value by the cost of the improvement.
d. be fully depreciated in the year the improvement is made.
136. If a deed provides for an easement granting ingress and egress over a neighboring property
but fails to locate the easement, the:
a. deed is void.
b. deed is voidable.
c. servient tenement holder can specify a particular area so long as it is reasonable.
d. dominant tenement holder can choose any area for access.
137. When one broker authorizes another broker to act as their subagent on the approval of the
seller, the subagent is primarily responsible to the:
a. seller. c. Department of Real Estate
(DRE).
b. original broker. d. buyer’s broker.
138. The placement of a house upon the lot is referred to as its:
a. preference. c. orientation.
b. zoning classification. d. location.
139. A deed restriction prohibits a subdivision from using a residential property as a business. A
buyer interested in purchasing a property in the subdivision tells their broker they intend to
use one room of their house as a dog grooming service. Can the buyer do so?
a. Yes, so long as none of the neighbor notice.
b. Yes, if the homeowners’ association (HOA) grants them explicit permission.
c. Yes, so long as they only groom dogs from within the subdivision.
d. No, the deed restriction prohibits the use of a residential property to conduct business.
140. All of the following are sufficient to transfer an interest in real estate, except:
a. A lease. c. A bill of sale.
b. A deed. d. A contract of sale.
141. The term “Realtor” denotes:
a. authorization to conduct real estate transactions.
b. authorization to provide real estate settlement services.
c. a higher legal standard of ethical conduct.
d. membership in a real estate trade organization.
142. Under the replacement cost approach of appraisal, an appraiser is least interested in:
a. depreciation. c. the effective age of the property.
b. the original cost to build. d. the value of the land.
Simulated Exam #2 213
17. b – Advance fees are monies received before they are earned. Note that answer choice A.
kickbacks is illegal. Choices that are illegal or unethical will only be right if they are expressed
as such.
18. c – Grant deeds transfer title to property. When an exception is stated, a portion of the
property is not transferred with the grant deed. For example, consider an easement being
retained by the owner, or a specific space such as highway frontage or beach frontage to be
held for other purposes.
19. a – Restrictions, such as conditions, covenants and restrictions (CC&Rs) for a subdivision
need to be recorded as a statement on the deed or as a reference to another recorded document
such as the subdivision restrictions.
20. a – The commission for hard money lenders is set by law within the Business and Professions
Code. The size of the loan, the length of the loan term and whether it is a first trust deed or a
junior mortgage affect the commission that may be charged. A commission on first trust deeds
with a term of less than three years is limited to five percent. The commission is limited to ten
percent for those with a term of three years or longer. For junior trust deeds, the commission
limits are five percent for a term of less than two years, ten percent for a term of less than three
years, and fifteen percent for three years or longer.
21. a – As a specific lien, a seller carryback note will stipulate the specific property that is
securing the loan. If this is an income tax lien, it will be attached to everything the person
owns and be classified as a general lien.
22. d – The Real Estate Commissioner oversees and administers real estate law, the subdivided
lands law, and the regulations of the Real Estate Commissioner. Note these elements are
categorized as “laws” and “regulations,” not “rules,” which carry less effect than either
regulations or law.
23. c – The least favorable contingency to a seller in a seller’s market is the sale of the buyer’s
home, which could create lengthy delays in the closing of the subject transaction. The
alternatives are all common contingencies in a sale.
24. a – Seller Sally may sue agent Fred in a civil suit for the false promise made by agent Fred.
The alternative answer choices all contain weaknesses which prevent them from being the
best answer selection. Cancelling the sale will create a possible liability to the buyer who had
no part in Fred’s promise. Criminal action for fraud is challenging and has little benefit for
Sally.
25. c – Twice in ten years is the critical number for determining the frequency of floods.
26. a – This is an EXCEPT question. A contract need not be in writing to be valid. There are four
conditions for the formation of a valid contract. The missing condition that is not provided as
an answer selection is capable parties.
27. d – This is a NOT question. An illegal purpose makes the contract inherently void, not
voidable purely at the discretion of the parties. Alternatively, a voidable contract is one that
can be enforced by the party who has the option to perform or not.
28. b – A net lease causes the lessee (tenant) to pay certain expenses such as taxes and maintenance
in addition to the rent. This question refers to how the rent is calculated on a commercial
property. There are three basic formulas: a gross lease requires the lessor (landlord) to pay
all expenses. In a percentage lease arrangement, the rental amount is set as a percent of the
sales of the business.
29. d – Another question in this simulated exam mentions that a percentage lease establishes
the rental charge based on the sales of the business tenant.
216 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
30. d – On listings for one-to-four unit residential properties, the broker is required to state that
commission rates are negotiable and not fixed by law. This is a public policy requirement
under federal law written to protect the less experienced buyer. The property type is the way
this targeted group of buyers is distinguished.
31. b – The broker may accept the listing of an emancipated minor. A 16-year-old emancipated
minor may be treated as an adult who has the right to buy and sell real estate.
32. c – Answer choices A, B and C are all terms related to riparian rights. Refer to the glossary to
become familiar with each.
33. c – Direct building costs are the construction costs incurred for labor and materials. All other
expenses are indirect.
34. a – Post and beam construction is the correct answer choice. Note the use of the word “posts”
in the question as it matches the correct answer choice.
35. c – Deciduous refers to trees that lose their leaves in the winter, and is thus not a soil condition.
36. a – A “gore” is a triangular piece of land. This is a question that requires the memorization of
an unusual term to earn the point.
37. b – Without disclosure of the dual agency, the actions of the agent will create an ostensible
agency relationship due to the appearance of acting as agent.
38. a – This is a NOT question. Subornation is a legal matter, to induce someone to perform an
illegal act such as perjury. It does not create an agency relationship. The alternative answer
selections are all possible ways to create an agency relationship.
39. b – The broker’s failure to disclose their interest in the syndication allows the seller to deny
the commission to the broker.
40. d – Depositing personal funds into a client’s trust account is an example of improper
commingling.
41. d – This is a NOT question. Estoppel is a legal theory barring a person from later asserting
or denying a condition based on the person’s previous acts or statements, and thus will not
terminate an agency relationship. The alternative answer selections are ways in which an
agency relationship is terminated.
42. b – Failure to disclose a dual agency status can lead to liability for any losses experienced
by the client.
43. d – In the cost approach, the cost of constructing the property improvements and the cost of
the land are handled separately and then combined to arrive at a final value for the complete
property. The other two appraisal approaches are: sales comparison – comparing the subject
property to similar properties recently sold – and the income approach – developing a
property’s value by comparing the income generated by similar properties that have recently
sold to the income generated by the subject property.
44. c – An appraiser is the individual who is most helpful in estimating accrued depreciation.
45. a – The beneficial use of a property is the best choice as an economic factor. Of the alternative
answer choices, B and C are unusual since real estate is considered immobile (versus personal
property which is mobile). Answer selection D has merit, yet if the building is empty or of
little practical use, the size of the structure itself is not an important economic factor for the
property.
46. a – The required notice for a final/balloon payment due date is three to five months (90 to
150 days) prior to the due date. The nature of a final/balloon payment, which can be quite
large compared to the preceding regular monthly payments, necessitates a significant amount
of advance notice.
Simulated Exam #2 217
47. c – Alienation is a transfer of property, such as a sale. Thus, it is the opposite of acquisition,
which is a purchase of a property.
48. d – Operating costs, interest expenses and debt service have no effect on a property’s cost
basis. The cost basis equals the purchase price + improvements - depreciation.
49. c – A sale from an estate involves a court and will therefore require court approval.
50. b – The broker needs to exercise reasonable supervision over their sales staff, including
independent contractors. Real estate salespersons are classified as employees for legal purposes
and independent contractors for income tax purposes. Answer selection A does not apply and
C and D are rare exceptions.
51. c – Written contracts are required to properly document a broker’s employment of a
salesperson. The contract will state the duties of the broker and agent and who is responsible
for a variety of issues such as risk management maintenance, insurance requirements and the
split of commissions.
52. d – A broker may be disciplined by the Department of Real Estate (DRE) for secret profits,
commingling of client funds and failing to supervise their sales staff.
53. d – The broker needs to be involved in the transaction representing one of the principals or
themselves in order to act as the escrow officer.
54. d – The salesperson is an employee of the broker and primarily responsible to the broker.
The broker represents the principal.
55. d – The buyer has no obligation to disclose facts to the seller.
56. d – The purchase price previously paid for a property has no bearing on the property’s future
value.
57. d – In order to establish a fictitious business name (DBA), a broker is required to record the
name with the county recorder, publish the name in a newspaper of general circulation and
have a broker’s license issued by the DRE in that name.
58. b – The California Bureau of Real Estate Appraisers (CalBREA) is the entity that controls
appraiser licensing in California. The name should make this an easy point.
59. b – Defacing occurs when a document is improperly modified on its face, usually by striking
copy and interlineation, after it is signed by one or both parties.
60. a – The broker’s fiduciary duty owed to their client requires that all offers be presented so
that the seller is allowed to make a decision as to which is best for them.
61. d – Proper disclosure practice requires that the seller be aware of the nature and condition
of the deposit. The seller’s acceptance of the offer, in part, is an acceptance of the condition of
the deposit. This is a material fact regarding the offer.
62. a – The overall value of the property includes the land it is situated on. Thus, when the house
is smaller, the price per square foot will be higher since the cost of the underlying land is
divided into fewer square feet.
63. b – This is a NOT question. An arm’s length transaction represents the fair market value
of a property uninfluenced by external forces, such as business or familial relations. When a
comparable is not arm’s length, its sales price may be higher or lower than market and thus
will affect the subject accordingly.
64. b – The cracks in walls or floors are more likely to be a soil stability concern rather than a pest
issue, and thus are best addressed with a soil engineer’s report. The environmental impact
report (EIR) will have no value nor will the home warranty insurance.
65. b – Appreciation is an increase in property value, not an element of value. The four
elements of value are: Demand, Utility, Scarcity and Transferability (DUST).
218 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
66. a – Committing waste to a property, failing to properly maintain the property or being
delinquent in the payment of property taxes is considered a default.
67. c – Both forgery and incapacity are a suitable defense against a holder in due course. A
holder in due course is one who has taken a note, check or bill of exchange in due course: 1.
before it was overdue; 2. in good faith and for value; and 3. without knowledge that it has been
previously dishonored and without notice of any defect at the time it was negotiated.
68. a – An escrow is to close within a reasonable time. In some instances this may be shorter
than 30 days or longer than 90, and thus there is no specific time period prescribed. A prudent
person is able to adjust the closing of escrow in accordance with a specific type of property,
location or market condition.
69. a – The buyer’s and seller’s closing statements will always be different. The two principals
will have opposite positions on a number of entries. For example, the sales price is a credit to
the seller and a debit for the buyer.
70. c – The suggestion that a property is more suitable to one group of people – retirees – is viewed
as discrimination. Alternatively, it is acceptable to have requirements for a roommate and
state an opinion such as a “good neighborhood.”
71. d – The requirements for a real estate license include passing the state exam, being at least
18 years of age, and being honest and truthful.
72. b – Residential transfer requirements include compliance with smoke detector and
carbon monoxide gas detector laws, as well as water heater bracing, anchoring or strapping.
73. c – The broker must seek the written consent from the buyer before releasing the deposit
check to the seller. As the offer has already been accepted, a counteroffer is not possible.
74. a – When the salesperson is found guilty of misrepresenting the property to the buyer, they
(and their broker) are subject to disciplinary and civil action. There may also be criminal action
if the misrepresentation rises to the level of fraud or causes sufficient harm. They are not likely
subject to action from the California Secretary of State (SOS).
75. a – The Transfer Disclosure Statement (TDS) discloses the physical elements of a property,
both positive and negative. The alternative answer selections are easily refused – no advertising
speaks to specific negatives, a preliminary title report has no way to recognize mold unless a
document were recorded with the county, and there is little likelihood of a comment on the
listing (employment) contract.
76. b – A public report issued by the Real Estate Commissioner has to be made available to
anyone who requests it. The report contains all material facts regarding the subdivision,
including financial matters and items of record such as CC&R’s.
77. c – To store documents electronically, the method of storage needs to allow for the
document to be written once and read many times (WORM). Answer selections A, B and D
are not related to document storage.
78. d – Asking questions as to why the seller wants to list their property is always appropriate.
The alternative answers will not serve the client well and do not fulfill the broker’s fiduciary
responsibility to their client.
79. d – All of these answer selections are appropriate and enforceable clauses to include in a
seller’s exclusive listing agreement.
80. a – Confidential financial information needs to be protected indefinitely.
81. a – The vendee’s rights under an installment sale — possession of the property — are called
an equitable interest. None of the other answer choices are conferred under an installment
sale.
Simulated Exam #2 219
82. c – This is a promise for a promise — the basis of any bilateral contract.
83. a – A buyer’s listing is the appropriate contract for the purpose of negotiating fees as the
buyer’s broker.
84. d – A landlord is required to provide a signed copy of the lease to the tenant within 15
calendar days of its execution by the tenant.
85. c – A flat best describes an individual unit in a multi-story apartment building. Answer
selection D. duplex is a two-story apartment in a multi-story residential building. Answer
selection A. penthouse has to be the top floor and is thus too limited. Answer selection B.
studio is a specific style of apartment.
86. a – One board foot is the volume of a piece of lumber that measures 12 in. x 12 in. x 1 in. Only
answer selection A contains the same amount of volume.
87. a – Sam is the owner since he recorded the deed. Constructive notice can be either the
recorded deed or possession. Since Blake retained possession, Sam had no way of knowing
that Frank previously purchased the house. This makes Sam a bona fide buyer.
88. a – Most real estate investments are funded by both borrowed monies (mortgages) and cash
down payments (investor funds).
89. c – A single line of stores can be seen as a strip commercial building. A neighborhood center
includes a supermarket and possibly another anchor such as a drug store, but is not necessarily
organized in a line. A small mall and big box store are similarly not organized in a line.
90. c – Both personal and real property are owned and convey to the owner certain rights and
interests.
91. d – A future divorce is a condition subsequent. The two conditions – precedent and
subsequent – refer to actions that alienate title. A condition precedent is how one gains title
(unless and until completion of a specified act or event); a condition subsequent is how one
loses title (the failure or non-performance of a condition).
92. c – A court ordered injunction requires someone to cease and desist an inappropriate
activity. Both choices A. attachment lien and D. mechanic’s lien are liens that state a
specific amount of money, which is not being sought by the HOA in this scenario. Answer
selection D. lis pendens is a recorded document to deliver constructive notice of a pending
lawsuit.
93. a – When a failure to disclose a material fact is later discovered, the appropriate action by
the buyer is to sue both the seller and the broker.
94. a – It is the client who grants the broker the authority to act on the client’s behalf. The authority
granted by the client is limited by what they actually or ostensibly confer to the broker.
95. a – The agent’s fiduciary duty requires them to present every offer received, allowing the
seller to decide how to respond. However, if the offer is clearly frivolous or the agent receives
specific instructions from their seller, the agent is not required to submit the offer.
96. c – This is an EXCEPT question. An in-house sale is one where the listing is sold by an agent
within the same firm. Since the listing broker represents the seller, the only condition that
cannot occur is for the broker to represent only the buyer.
97. a – The seller’s listing broker is required to disclose all material facts about the property. The
listing broker owes a general duty to the buyer to be fair and honest.
98. a – The seller, being the legal owner of the property, needs to decide whether to allow the
buyer to make repairs to the property prior to the close of escrow. Allowing the buyer to enter
the property prior to the close of escrow presents two primary concerns: liability for something
220 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
that goes wrong when the buyer is on the property – such as personal injury or damage to
the property – and the possibility that escrow may fail to close after the buyer has altered the
property.
99. d – Agency is the relationship between a licensed agent and principals as well as other brokers
and finders.
100. c – An agency relationship cannot be terminated by a refusal to perform.
101. d – The estate for years need not be an extended period of time or even a full year. However,
it must be for a specific period of time, as occurs under a lease.
102. d – This is a LEAST LIKELY question. A gross lease refers to the form of rental payment.
Under a gross lease, the landlord retains the responsibility for payment of all costs of care
and maintenance. Only the retail property may be the exception because it is a business
and typically subject to a net lease, which requires the tenant to pay all maintenance and
operating costs. The property types given in the alternative answer selections use gross leases.
103. b – A smoke detector is not an environmental hazard.
104. d – Note that this question refers to a specific form of construction – masonry buildings with
wood frame floors or roofs. Otherwise, the earthquake safety guide needs to be delivered to
buyers of all homes built prior to 1960.
105. c – The independent contractor status of real estate salespersons is for purposes of tax
reporting. Under labor laws, independent contractors are classified as employees. They are
always subject to broker supervision.
106. c – Any individual may contact the Real Estate Commissioner to report potential fraud
by a licensee. The Commissioner is empowered to investigate and discipline licensees for
inappropriate behavior.
107. b – Habendum is the clause that defines the nature of the estate being granted. This reiterates
the importance of terminology. Answer selection A. seisin is the ownership and possession
of property. Answer selection C. subrogation is the substitution of one person for another in
a legal matter. Answer selection D. due on is a trust deed provision used by lenders to call the
loan immediately due and payable on an owner’s transfer of any interest in the real estate.
108. a – The Americans with Disabilities Act (ADA) prohibits employers from discriminating
against persons with disabilities. Note the question states “disabled,” a term which appears in
the correct answer.
109. d – This is a LEAST question. Each answer selection has merit, but to suggest external factors
never apply makes this answer selection the LEAST likely to apply.
110. c – Economic life refers to the period of time a structure continues to earn income from
its operations. The use of “earn sufficient income” in the question should help lead to this
conclusion.
111. a – This is a LEAST question. The tax assessor appraisal has little to do with a property’s
market value.
112. b – This is a LEAST question. The original cost of a property has no significance in an appraisal
to determine its current value.
113. d – Easements, water rights and mineral rights all go with the land.
114. a – The minimum number of years you may depreciate rental investment property depends
on the type of property underlying the investment. While the period is 39 years in the context
of commercial property, the minimum number of years is 27.5 for residential property.
Here, the question references a 12-unit apartment building, thus the residential investment
property threshold of 27.5 applies.
Simulated Exam #2 221
115. d – Accrued depreciation can be a difficult number to calculate since it requires estimating
the effective age of the property. The alternative answer choices are all numbers that are
readily available in the industry.
116. b – Once the offer is accepted and the buyer has been notified of the acceptance, the estate is
required to honor the sale in the event the seller dies.
117. c – Trading down suggests either cash or another form of balancing compensation was
received. The taxable gain occurs when anything other than like-kind real estate is received
on the exchange.
118. d –The neutral escrow agent cannot unilaterally make a decision that affects either principal.
Once the buyer has deposited money or the seller has deposited documents, approval by both
parties is required before either can be released.
119. d – All relationships that create a potential conflict need to be disclosed.
120. a – The savings account is the only answer choice where an annual percentage yield
(APY) applies.
121. c – The person who benefits most from an assignment of rents clause is the beneficiary
(lender). The assignment of rents allows the lender to receive the rents tendered by tenants
when the borrower is in default.
122. c – The customers of a prepaid rental listing service need to be aware of the company’s
location at all times. Therefore, if they move, the company is required to inform customers and
clients in advance of the move.
123. b – The broker needs to inform the buyer of any information the broker previously relayed
from the seller which they have discovered to be false.
124. d – A plot plan shows where a building and other site improvements will be located.
Alternatively, a plat map shows the shape and size of a parcel of land and how it relates to
other parcels in the immediate area.
125. d – An elevation sheet is a drawing that depicts the appearance of the front and side of a
home to be built. It is used in advertisements, brochures and other point of sale renderings.
126. b – The employment contract is unaffected by the death of corporate officers as the client is
the corporation. New officers will be named who need to honor the terms of the listing.
127. d – None of these are necessary for creating an agency relationship. An agency relationship
need not be in writing nor expressed. Agency can be created by emergency or implication.
128. c – At a trustee’s sale, the buyer receives a trustee’s deed. Here, the answer is given in the
question.
129. d – A wild document is one that does not fit into a chain of title. Since the county records
show Frank as the owner, it will require a deed from Frank to transfer the property.
130. c – Megan’s Law is a database of registered sex offenders.
131. a – Supplemental taxes are those which cover the remaining portion of the year after escrow
closes. Property taxes are levied from July to June of the following year. If an escrow closed on
April 1st, the buyer is obligated for the final quarter of the year. If the transfer price is higher
than the assessed value, the supplemental bill will be ¼ of the annual tax expense for the
additional value.
132. d – Read the question carefully. Under an exclusive agency listing, the seller is not required
to pay any commission to the broker when the seller personally sells the property. Payment of
a fee would be required under a seller’s exclusive right-to-sell listing.
222 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
133. c – Six percent (6%) multiplied by $220,000 (sales price) = $13,200 commission. This amount
multiplied by seventy-five percent (75%) = $9,900 as a net brokerage fee.
134. c – The appraisal process that allocates a percentage of a property’s total value to land and a
percentage to the improvements is known as the allocation method. It is the ratio of total
value to the site value.
135. b – This is an ALWAYS question. The book value of a property is based on cost. Therefore,
a capital improvement cost is always added to the current book value, though it does not
necessarily increase the market value accordingly.
136. c – The servient tenement (the owner of the neighboring property burdened by the easement)
can define the location of the easement provided it is reasonable.
137. a – Unlike a sales agent, the subagent broker becomes primarily responsible to the seller and
not the original broker when they have the seller’s approval.
138. c – The placement of a house on its lot is called its orientation. This is also used to describe a
direction such as “oriented toward the southern exposure.” Other than location, the alternative
answer selections can be easily eliminated.
139. d – A deed restriction against commercial use is valid. Therefore, the answer is no, the buyer
cannot use the property for business purposes.
140. c – This is an INSUFFICIENT question. The question asks which cannot transfer real estate.
A bill of sale is used for personal property and thus cannot be used to transfer real estate.
141. d – The term “Realtor” is a trademarked term which denotes membership to a real estate trade
union.
142. b – This is a LEAST question. The original cost to build a property has no bearing on a current
appraisal. The alternative answer selections are all necessary to complete a cost approach
appraisal.
143. b – An “as is” clause in a residential purchase agreement tends to create problems and
questions. An “as is” clause only applies to material facts that have been disclosed or which
are visually observable.
144. c – A subagent is delegated agency duties by an agent of the client.
145. d – This is a NOT question. An easement has no specific value. The alternative answer
selections are all court-related and have concrete dollar values.
146. c – In a dual agency situation, financial information, such as a price acceptable to the
seller or terms the buyer is willing to offer, and a principal’s personal information cannot
be shared with the other client.
147. b – This is a NOT question. Land is not depreciable. Any structure is depreciable so long as
it is used for business or investment purposes.
148. c – Filing a lawsuit against the seller is the only means for a broker to recover an earned
commission.
149. c – Relationships that may affect loyalty or fiduciary responsibilities need to be disclosed
as they constitute a conflict of interest.
150. c – Such intentional misrepresentations regarding the condition of the property may lead
to disciplinary action by the Department of Real Estate (DRE) or even civil and criminal
penalties if the buyer accepted these misleading statements as fact.
Simulated Exam #3 223
SIMULATED EXAM #3
1. A(n) belongs to and benefits an adjacent property and is said to run with the land
as an interest the adjacent property holds in the burdened real estate.
a. easement in gross c. encroachment
b. appurtenant easement d. personal easement
2. A(n) is a voluntary conveyance of the right to keep land in its natural or historic
condition.
a. solar easement c. coastal easement
b. conservation easement d. air easement
3. Which of the following does not create an agency relationship?
a. Implication. c. Express agreement.
b. Ratification. d. Coercion.
4. The Agency Law Disclosure form is not mandated to be presented to all parties when listing,
selling, buying or exchanging:
a. commercial property. c. mobilehomes.
b. trust deed notes. d. single family residential property.
5. All of the following create an agency relationship, except:
a. a verbal agreement. c. implication.
b. ratification. d. subordination.
6. When a seller’s agent takes a listing which does not authorize the listing broker to accept a
deposit from a buyer, the broker is to advise their agent that:
a. the broker will not be able to accept a deposit from a buyer.
b. it is an implied right of a broker to accept a deposit in behalf of the seller on any offer.
c. a deposit will be accepted and retained by the broker from the buyer, but only as an
agent for the buyer.
d. the deposit has to be paid directly to the seller’s agent.
7. When a dual agency is established in a one-to-four unit residential sales transaction, the
broker and their agents may pass on information relating to the from one party to
the other.
a. price of comparable homes in the neighborhood
b. maximum pricing obtainable from the buyer
c. minimum pricing sought by the seller
d. the terms of payment the seller may be willing to accept
8. When an opinion is coupled with advice expressing no further need for the buyer to investigate
and confirm the prediction, the opinion is elevated to the level of a:
a. guarantee. c. misnomer.
b. distinct possibility. d. fact.
9. All of the following maintain the stability of a residential neighborhood, except:
a. a high home sale turnover rate and increasing population density.
b. being located in the pathway of growth.
c. having many family households with school age children.
d. the conformity of residents with similar occupations.
224 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
10. The cost of a capital improvement and its effect on market value are:
a. always the same. c. generally the same.
b. never the same. d. rarely the same.
11. Which of the following basic real estate economic principles is the best expression of how the
value of real estate is maximized?
a. Anticipation. c. Contribution.
b. Highest and best use. d. Overleveraging
12. The method of appraisal which emphasizes the present worth of future benefits to be received
by the owner is the:
a. replacement cost approach. c. summation approach.
b. reproduction cost approach. d. income approach.
13. Consider an appraiser analyzing the site location of the subject property and three comparable
properties. The first comparable property is superior to the subject. The second comparable is
to superior to the first comparable but inferior to the third comparable. If the differential were
valued at $50,000 for each level of difference, the adjustments will be:
a. Comp one, -$50,000; Comp two, -$100,000; Comp three, -$50,000.
b. Comp one, +$50,000; Comp two, +$100,000; Comp three, +$50,000.
c. Comp one, -$50,000; Comp two, -$100,000; Comp three, +$150,000.
d. Comp one, -$50,000; Comp two, -$100,000; Comp three, -$150,000.
14. A listing broker needs to present all offers until:
a. an offer is accepted. c. all contingencies are removed.
b. escrow is opened. d. escrow is closed.
15. A lease is classified as a(n):
a. freehold estate. c. personal property interest.
b. estate at sufferance. d. remainder in interest.
16. All of the following are NOT examples of an implied covenant under a lease, except:
a. Possession. c. Quiet enjoyment.
b. Nuisance. d. Rental amount.
17. The license of an active salesperson working at a branch office is held at the:
a. Department of Real Estate (DRE) headquarters in Sacramento.
b. broker’s primary place of business.
c. branch office.
d. salesperson’s personal residence.
18. An owner of an investment firm has a securities dealer license, but not a real estate broker
license. The owner advertises and sells real estate for their clients. Since these transactions
require a real estate broker license, who will prosecute the owner for violating the real estate
law?
a. The U.S. Attorney General. c. The California Real Estate Commissioner.
b. The California Attorney General. d. The local District Attorney.
Simulated Exam #3 225
19. A seller sues their broker for making a false promise when they entered into an oral listing
agreement. What is the likely outcome?
a. The Statutes of Frauds protects the agent since the listing contract wasn’t in writing.
b. The seller is at fault for allowing the agent to work without a written contract.
c. Oral agreements cannot demonstrate evidence of a false promise.
d. The agent is liable for any damages as a result of the false promise regardless of the
Statute of Frauds since the agent breached their agency duty to the seller.
20. All of the following are NOT a fiduciary duty of the buyer’s agent, except:
a. Acting with the utmost loyalty and care toward the buyer.
b. Steering the buyer to racially compatible neighborhoods.
c. Telling the buyer which lender to use.
d. Overseeing the preparation and delivery of the transfer disclosure statement (TDS).
21. A federally chartered bank charges an additional $200 fee on loans made to non-English
speaking borrowers. This fee is:
a. permitted if the fee is justified by the additional cost of translating contracts and hiring
an interpreter.
b. in violation of the Holden Act.
c. not in violation of any Fair Housing laws or regulations.
d. prohibited under the Statute of Frauds.
22. The Fair Employment and Housing Act defines housing accommodations as improved or
unimproved real property used or intended to be used as a residence by the owner and which
consists of not more than:
a. four residential units. c. one single family residence (SFR).
b. ten residential units. d. five or more residential units.
23. The Homeowner’s Guide to Earthquake Safety needs to be delivered to the buyer of any one-to-
four unit residential property built prior to:
a. 1975. c. 1960.
b. 1965. d. 1950.
24. Ethics is most nearly defined as:
a. a broker’s responsibility to the public, their principal and other brokers.
b. honesty.
c. sincerity.
d. fiduciary.
25. Property can be transferred without consideration with a gift deed. However, the transfer by a
gift deed may be voided by:
a. the grantee. c. a debtor of the grantor.
b. a creditor of the grantor. d. the trustee.
26. The least protection from a defect in a property’s title is provided by a(n):
a. standard policy of title insurance. c. guarantee of title.
b. American Land Title Association d. abstract of title.
(ALTA) title policy.
226 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
27. For delivery of a deed to occur, a grantor must intend to convey title and the grantee needs to:
a. record the deed with the county. c. check the public records.
b. accept the deed as immediately effective. d. notarize and sign the deed.
28. A grant deed signed with an “X” is:
a. valid. c. unenforceable.
b. voidable. d. void.
29. In a carryback transaction, the seller as the beneficiary:
a. lends money to the trustee.
b. delivers a promissory note to the trustor.
c. signs the trust deed and delivers it to the trustee.
d. receives the promissory note and trust deed.
30. A dragnet clause in a mortgage covers:
a. future court actions that might be anticipated.
b. any additional parties added in the future to the loan.
c. whatever future advances may be made on a loan.
d. all activities of the heirs and assignees of the borrower.
31. A clause in a trust deed that declares the total unpaid balance due and payable upon a transfer
of the property is called a(n) clause.
a. arbitration c. due-on sale
b. liquidated damages d. forfeiture
32. Consider a recorded trust deed that refers to a template of standard clauses contained in a
previously recorded trust deed. The previously recorded trust deed is called a
trust deed.
a. disguised c. preliminary
b. fictitious d. long form
33. Economic rent is rent:
a. received for similar space in an open market free of duress or otherwise affected by
external conditions.
b. the property would produce in a perfect market.
c. necessary to produce a reasonable return on investment.
d. allowed by government controls, such as federal monetary policy or local rent control
ordinances.
34. Two similar locations are leased on a long term basis, one for a government building and
the other for a used car lot. Using the capitalization approach to appraise the properties, the
government building would demand a capitalization rate (cap rate).
a. lower c. higher
b. similar d. Cannot be determined.
35. All of the following contribute to obsolescence, except:
a. Outdated appliances.
b. Changes in flight pattern from local airport.
c. Misplaced improvements.
d. Physical deterioration.
Simulated Exam #3 227
36. The appraised value of a building is $800,000 but costs $1,200,000 to replace. This difference is
an example of:
a. supply and demand. c. accrued depreciation.
b. anticipation. d. remainder depreciation.
37. All of the following a dual agent may release, except:
a. the last names of either party. c. confidential pricing information.
b. the size of their fee. d. material facts about the property.
38. A dual agency is required to be disclosed to each client:
a. after escrow closes. c. before the parties meet.
b. the moment the conflict arises. d. any time prior to the close of escrow.
39. An agent is an individual who represents another, called the:
a. cooperating broker. c. appraiser.
b. principal. d. trustee.
40. Agency, whatever the type, is created by:
a. membership in a real estate trade union.
b. the conduct of each broker and their agents when interacting with a buyer or seller in a
transaction.
c. membership in a multiple listing service (MLS).
d. acquisition of a real estate license from the Department of Real Estate (DRE).
41. An easement differs from a license in that a license:
a. can be revoked. c. is created by a written agreement.
b. is assignable. d. is transferable.
42. The Energy Efficient Ratio (EER) rating concerns:
a. air conditioning and heating units.
b. environmental conservation requirements.
c. electrical energy usage.
d. utility efficiency of an income-producing property.
43. A sewer district’s right to run pipes through a homeowner’s property is an example of a(n):
a. servient tenement. c. easement in gross.
b. personal loss. d. riparian right.
44. In order to obtain an easement by prescription, one must:
a. use the property. c. physically confront the owner of the
property.
b. live on the property. d. own the property.
45. If an appraiser finds the interior walls and the inside of the exterior walls have a similar
temperature, this indicates:
a. the doors and windows are well sealed.
b. the insulation is sufficient.
c. more ventilation is needed on the property.
d. the heater is sufficient.
228 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
56. A resident of Nebraska who owns property in California dies while in Vermont. The probate
procedures for this property are handled in:
a. Nebraska. c. California or Nebraska.
b. California. d. federal court.
57. “Et ux” written into a document means:
a. “and extras.” c. “and son.”
b. “and wife.” d. “and others.”
58. Who is primarily responsible for disclosing to a buyer the existence of a Mello Roos tax
assessment on a parcel of real property?
a. The escrow officer. c. The selling agent.
b. The listing agent. d. The seller.
59. The Alquist-Priolo Special Study Zone earthquake disclosure requirement applies only to:
a. specific types of structures such as residential properties located in known earthquake
fault zones.
b. every structure in known earthquake fault zones.
c. specific building types in all counties in California.
d. unimproved properties in high risk areas.
60. It is acceptable for a real estate licensee to refuse to show a home to a minority prospect if:
a. the licensee sincerely believes that showing the property would cause panic in the
neighborhood.
b. the owner has stated in the listing that showings may be made only when they are
present, and the owner is currently out of town.
c. the owner has stated their home is not available to minority persons since they are
exempt from the 1968 Fair Housing Law.
d. the minority prospect has a criminal record and is on parole.
61. A land sales contract clause which prohibits any prepayment at any time after the year of the
sale:
a. is not enforceable.
b. voids the contract.
c. needs to be complied with by the vendee.
d. is voidable at the discretion of the vendee after five years.
62. In a land sales contract, the seller who is also acting as the lender is usually referred to as the:
a. trustee. c. vendee.
b. beneficiary. d. vendor.
63. A licensee’s Department of Real Estate (DRE) license number does not need to appear:
a. in the licensee’s car if it is used to drive clients to properties.
b. on listing and employment contracts.
c. on marketing materials and other points of contact with the public.
d. on purchase agreements.
64. If a broker is to appraise a property and generate an appraisal report, they need to:
a. only appraise properties they are listing. c. charge no more than $500 for the service.
b. be a licensed or certified appraiser. d. advertise their appraisal service.
230 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
65. The owner of a residential property found guilty of discrimination in violation of the Rumford
Act may be required to:
a. sell or rent the property to the aggrieved person.
b. find a similar property to rent to the aggrieved person if one is available.
c. pay a civil penalty of $10,000.
d. Any of the above.
66. A listing agent of a one-to-four unit residential property owes an affirmative duty to a
prospective buyer to gather or voluntarily provide the buyer with facts about:
a. the property’s title conditions.
b. observations they made while conducting their mandatory visual inspection.
c. the suitability of the property to meet the buyer’s objectives.
d. defects which may occur in the future.
67. The Real Estate Commissioner’s stated policy is to create a “color blind” industry that facilitates
voluntary, peaceful, equal opportunities in housing. What does this mean?
a. That race, creed, sexual orientation and color is not a material fact in a real estate
transaction.
b. Brokers and salespeople are to maintain an attitude that is absolutely free from bias.
c. Separate but equal.
d. Both a. and b.
68. Title VIII, also known as the Federal Fair Housing Act, refers to the:
a. Civil Rights Act of 1968. c. Civil Rights Act of 1964.
b. Unruh Act. d. Rumsford Act.
69. A broker may refuse to present a low offer to their seller when the offer is clearly frivolous or:
a. the broker has clear instructions to not submit an offer below a certain price.
b. the offer is submitted by a buyer with a very large family who intends to occupy the
property.
c. the offer is submitted by a member of a protected group.
d. A broker may never refuse to present an offer.
70. Though brokers typically hire agents as independent contractors (ICs), under labor law, an
agent is a(n) of the broker.
a. employee c. manager
b. advisor d. partner
71. A transfer by deed is void when:
a. the grantor’s name is fictitious.
b. the grantee is nonexistent.
c. the grantee’s name is fictitious.
d. the deed is obtained through false representations.
72. All of the following are considered to be a contract, except:
a. A net listing. c. A deed.
b. A mortgage. d. A land sales contract.
Simulated Exam #3 231
82. On the transfer of real property, a previous grant of an unlocated easement is:
a. valid.
b. void upon transfer.
c. voidable by the servient tenement if not used for five years.
d. voidable by the servient tenement since a deed cannot be the instrument used to create
an easement.
83. A broker cannot act for more than one party in a transaction without disclosing their dual
agency and obtaining:
a. a dual role license.
b. the consent of both clients.
c. a special permit from the Department of Justice (DOJ).
d. approval from the California Association of Realtors (CAR).
84. The property which benefits from an easement is referred to as the:
a. servient tenement. c. dominant tenement.
b. diminutive tenement. d. domicile tenement.
85. When land is subject to an easement, it is said to be:
a. encroached upon. c. an estate at sufferance.
b. encumbered. d. restricted.
86. An acquired right to use land that is less than an estate is known as a(n):
a. leasehold. c. riparian right.
b. remainder. d. easement.
87. An easement may be created for what length of time?
a. Perpetuity. c. The lifetime of a person.
b. An agreed-to period of time. d. Any of the above.
88. When a landowner is given the right to take water from another property, the owner receives
the right of:
a. avulsion. c. percolation.
b. alluvium. d. appropriation.
89. Chuck wills the family estate to Matt with the provision that title will transfer when he marries.
This is an example of a(n):
a. covenant. c. condition precedent.
b. restriction. d. condition subsequent.
90. An owner of a condominium unit owns:
a. the common walls between the units.
b. lawns and walkways in the common areas.
c. the common heating system.
d. the airspace within their unit.
91. Failure to provide the Agency Law Disclosure in targeted transactions:
a. puts the agent’s fee at risk of loss.
b. renders the transaction invalid.
c. affects only the listing half of a commission.
d. affects only the salesperson’s share of the commission.
Simulated Exam #3 233
108. A broker presents an offer to purchase real property made by a minority buyer. The seller
rejects the offer due to the buyer’s race. Here, the broker may:
a. explain to the seller that their refusal is a violation of the Fair Housing Act of 1968, and
that they are open to civil and criminal penalties.
b. advise the buyer of their right to file a complaint with the Department of Housing and
Urban Development (HUD).
c. sue the seller for their commission.
d. All of the above.
109. An apartment building owner’s newspaper advertisement is in violation of fair housing
laws if it states:
a. “adults only.” c. “no pets.”
b. “no smoking.” d. “spacious bathrooms.”
110. A listing broker can have any of the following agency relationships except:
a. buyer’s agent. c. dual agent.
b. seller’s agent. d. listing agent.
111. refers to the placement of a house upon its lot.
a. Orientation c. Zoning
b. Physical location d. Subordination
112. In the land of another, all of the following is an acquired right of use, but not an estate, except:
a. Mortgage. c. Devise.
b. Trespass. d. Easement.
113. An easement that does not specify a location is:
a. voidable. c. valid.
b. unenforceable. d. void.
114. Which of the following is the best example of functional obsolescence?
a. The close proximity of noxious fumes generated by a neighboring property.
b. Adverse zoning within the adjoining neighborhood.
c. No air conditioning in a building located in an arid, desert environment.
d. Rotted eaves.
115. Which of the following type of rental income would be the highest?
a. Scheduled gross income.
b. Gross operating income.
c. Net operating income (NOI).
d. Net spendable income.
116. The gross rent multiplier (GRM) is determined by:
a. dividing the sales price by the gross scheduled rent.
b. subtracting the vacancy factor from the scheduled rent.
c. dividing the price by the number of available rental units.
d. dividing sales price by net spendable income.
236 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
117. All of the following are NOT classified as finance charges under the federal Truth-in-Lending
Act (TILA), except:
a. Document preparation fees. c. Title insurance costs.
b. Loan assumption fees. d. Appraisal fees.
118. What does “discounting” refer to in the context of real estate finance?
a. The process of calculating the annual percentage rate (APR) of a given loan.
b. Liquidating real property that secures a debt in default.
c. The loan proceeds disbursed to the lender when reselling a note and trust deed.
d. Subordinating a debt.
119. When the Federal Reserve (the Fed) intends to tighten the amount of money in circulation,
it sells government bonds on the open market and:
a. lowers the discount rate.
b. raises the amount of reserves required for member banks.
c. purchases a greater volume of foreign currency.
d. deregulates the mortgage lending industry.
120. The Franchise Investment Law exists to protect:
a. sub-franchisors who have an exclusive geographic territory.
b. prospective franchisees prior to the purchase of a franchise.
c. investors in franchisor corporations.
d. the general public.
121. A tenant who remains in possession of a property on expiration of a lease without an
agreement or acceptance of rent by the landlord becomes a(n):
a. tenant at sufferance. c. tenant-in-foreclosure.
b. equity purchaser. d. bona fide purchaser.
122. A(n) reconveys the real estate to the landlord in exchange for cancellation of the
lease agreement.
a. notice of termination c. notice of change in rental terms
b. notice to vacate d. surrender
123. Broker Freddie takes an exclusive right to sell listing to sell a home on Monday evening. This
listing may be described as an:
a. implied, bilateral, executed, employment contract.
b. express, bilateral, executory, employment contract.
c. oral, unilateral, executory, employment contract.
d. express, unilateral, executed, employment contract.
124. Which of these documents provides the most protection to a property owner in default?
a. A first trust deed. c. A land sales contract.
b. A mortgage. d. A fixed-term lease with an option to buy.
125. What is meant by “unadjusted basis”?
a. The original cost of a property minus losses and depreciation.
b. The original cost of a property plus improvements minus depreciation.
c. The equity built up in a property due to amortization.
d. The original cost of a property.
Simulated Exam #3 237
126. Seller Suzy provides carryback financing to Buyer Mel secured by a trust deed. Mel goes into
default. Which of the following statements is true?
a. Suzy can get a court order to force Mel to vacate the property.
b. Suzy can treat Mel as a tenant and define the deed as an invalid security device.
c. Suzy can sue Mel for possession.
d. Mel will have a period of time to redeem the property.
127. A published advertisement by a real estate broker needs to include:
a. their Department of Real Estate (DRE) license number.
b. the physical address of their office.
c. the fax number associated with the broker’s office.
d. reference to any negative actions taken against the broker’s license.
128. Unlike a lease, a license does not include:
a. rental payments. c. the right to exclude others from entry.
b. a termination date. d. All of the above.
129. When a lease is for a period greater than one year, all of the following is required in the
contract, except:
a. signatures of both the owner and tenant.
b. that the lease agreement be in writing.
c. a specific termination date.
d. a description of the rental and its location.
130. A property owner intending to sell their property wants to add specific instructions to the
listing specifying the property is not to be offered to anyone who is not a Caucasian. The
broker is to:
a. take the listing anyway and wait to see if anyone complains.
b. tell the owner it is unlikely that a minority member would want to move into the
neighborhood.
c. refuse to take the listing and explain to the owner that this discriminatory activity
violates both state and federal laws.
d. explain to the owner that a licensed broker cannot discriminate, but a private owner
can.
131. A Vietnamese couple walks into a real estate office. The salesperson:
a. has no obligation to show them homes in non-Asian neighborhoods.
b. needs to show them a minimum of three homes in a primarily white neighborhood.
c. does not need to provide any service to the prospects.
d. needs to treat them like everyone else.
132. A real estate salesperson tells their buyer, “If you buy this property then sell it in three years,
you will double your money.” Three years after the purchase, the value of the property has
not increased. In this situation, the:
a. buyer has no recourse.
b. salesperson is guilty of puffing which is not a crime.
c. salesperson’s broker is subject to discipline.
d. salesperson and their broker may be found guilty of fraud.
238 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
133. When an interest in property is acquired by prescription rather than adverse possession, the
interest may be described as:
a. the right to use land which belongs to someone else.
b. a private grant.
c. legal title.
d. a cloud on title to the benefiting property.
134. Frank leased a property to Chester. Chester gave Mark an easement over the property. At the
end of the lease term:
a. Frank regains the property subject to the rights of Mark.
b. the easement may not extend beyond the term of Chester’s lease.
c. Mark has an equitable right to use the land.
d. Frank regains control of the property since a tenant cannot grant an easement, only an
owner.
135. When a real estate broker fails to address all lawful instructions given by their principal, the
broker could:
a. face criminal charges.
b. have their driver’s license suspended.
c. be liable for the principal’s financial losses resulting from their actions.
d. be compelled to retake the state licensing exam.
136. The is a succinct restatement of existing agency codes and case law on agency
relationships in targeted real estate transactions.
a. Transfer Disclosure Statement (TDS)
b. Natural Hazard Disclosure (NHD)
c. Agency Law Disclosure
d. Fair Housing Law
137. Brokerage events triggering a listing agent’s preparation of a seller’s net sheet includes:
a. entering into a seller’s listing agreement.
b. submitting a buyer’s purchase agreement to a seller.
c. Both a. and b.
d. Neither a. nor b.
138. When is the usefulness of the appraisal cost approach the least appropriate?
a. When appraising homes in a new subdivision.
b. When appraising an old structure with many functional deficiencies.
c. When appraising raw land intended for future construction.
d. When appraising a mixed use property.
139. A property’s effective gross income is found by deducting which of the following from the
scheduled gross income?
a. Property management fees. c. Debt service.
b. Vacancies and credit losses. d. Depreciation.
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140. All of the following properties do NOT require the use of a lead-based paint disclosure, except:
a. Single family residences (SFRs) built in 1975.
b. Senior citizen housing built in 1986.
c. Homes for the disabled built after the passing of the Americans with Disability Act
(ADA).
d. Multi-family homes built after 1990.
141. A negative declaration issued for an environmental impact report (EIR):
a. indicates no negative influence of the development on the surrounding environment.
b. shows whether the developer had a previous record of poorly designed subdivisions.
c. is a positive statement made by the government in favor of the developer.
d. is typically issued by a governmental authority after an initial review period.
142. The Federal Fair Housing Act (FFHA) prohibits discrimination in the sale, rental and
advertisement of:
a. residential units. c. industrial properties.
b. commercial properties. d. land used for the grazing of livestock.
143. The preamble of the Federal Fair Housing Law states its purpose is to eliminate discrimination
in housing and to:
a. provide fair housing for everyone throughout the United States.
b. establish Fannie Mae.
c. provide low-cost housing for all.
d. create equal employment opportunities for all protected classes.
144. All of the following requirements made by a landlord are lawful, except:
a. Requiring a 600 or better FICO score.
b. Requiring cosigners for unmarried lessees.
c. Requiring each adult occupant to sign a tenant rules agreement.
d. Prohibiting the use of waterbeds in the property.
145. Based on the principle of leverage, an investor will:
a. use their own funds whenever possible.
b. use borrowed money only to the degree deemed safe and reasonable.
c. buy income property with a minimum down payment.
d. invest in rental properties with declining values.
146. One year after his real estate license expired, Claude renewed the license. Which of the
following is a true statement?
a. Claude can operate under a restricted license during his suspension.
b. Claude has to retake the license examination.
c. Until the license was renewed, Claude was not allowed to participate in anything that
required a license.
d. Claude is no longer eligible for a license.
240 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
147. If a lessee transfers all of their interests in a property, the transferee who receives the lessee’s
interest is classified as a(n):
a. assignee. c. vendee.
b. assignor. d. vendor.
148. When two brokers make a verbal agreement to split a commission, the agreement is:
a. void. c. unenforceable.
b. voidable. d. enforceable.
149. When the vendee under a land sales contract makes payments which include an impound
for taxes:
a. the vendor needs to hold the monies in a trust account.
b. the vendor can use the monies for other uses so long as they pay the taxes when due.
c. the vendor can keep the monies anywhere so long as they don’t convert the funds.
d. the vendor cannot hold the impounds unless they are licensed with the Department of
Real Estate (DRE).
150. A lease conveys a(n) in real estate to a tenant.
a. exclusive possessory interest c. nonexclusive possessory interest
b. personal privilege d. irrevocable privilege
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16. c – The promise of quiet enjoyment is an implied covenant the lessor makes to the lessee. A
covenant is a promise.
17. b – A salesperson’s license hangs at their supervising broker’s primary place of business.
18. d – The local District Attorney is the authority that will prosecute the owner in this case.
This is not a federal crime subject to action by the U.S. Attorney General, and the Department
of Real Estate (DRE) can only discipline licensees. The remaining answer choice is the state
Attorney General, which is not typically interested in this type of dispute.
19. d – A false promise imposes liability on a broker whether the promise was made in writing
or orally. The alternative answer selections fail primarily because the court will protect the
public rather than the agent.
20. a – A buyer’s agent owes their buyer a fiduciary duty to act with the utmost loyalty and
care toward the buyer. The agent cannot dictate which lender the buyer uses and steering
violates fair housing laws. Preparation and the delivery of the transfer disclosure (TDS) is the
responsibility of the seller and the seller’s agent.
21. b – The California Holden Act makes it unlawful to discriminate in real estate financing by
charging additional fees only to a certain group of people.
22. a – Fair housing laws are always based on one-to-four unit residential properties. This is
true for lending under The Real Estate Settlement Procedures Act (RESPA) as well as rental and
purchase arrangements handled by a licensed agent.
23. c – The 1960 disclosure date of earthquake safety is true for one-to-four unit residential
properties. However, there are other applicable dates for specific types of construction.
24. a – Given the choices offered, answer selection A. a broker’s responsibility to the public,
their principal and other brokers is the best description of ethics in real estate. Each of the
alternative answer choices may seem appropriate, but not sufficiently inclusive.
25. b – Creditors of a grantor may void a transfer by a gift deed. The grantor cannot gift the
property to another in order to avoid debt held by a creditor.
26. d – This is a LEAST question. An abstract of title is simply a report showing the chain of title
issued by the title company after a search of title records. It does not provide protection from
title defects, and a disclaimer in the report indemnifies the company against any missing or
inaccurate records. Answer choices A. standard policy of title insurance and B. American
Land Title Association (ALTA) title policy are both insurance policies. C. guarantee of
title is a formal guarantee by the title company.
27. b – For delivery of a deed to occur, the grantee needs to accept the deed as immediately effective,
not effective at a later date.
28. a – A grant deed signed with an “X” is valid. However, it will require proof that the “X” was an
intended signature by the grantor.
29. d – When the seller extends carryback financing to a buyer, the seller receives the note
and trust deed, much like a lender. This is an excellent opportunity to consider what each
participant does in a carryback loan arrangement. Both documents are signed by the buyer/
borrower. The trustee plays no role at this time.
30. c – In the context of mortgages, dragnet reflects any future advances made to or on behalf of
the borrower.
31. c – A due-on-sale clause is a trust deed provision used by lenders to call the loan immediately
due and payable, a right triggered by the owner’s transfer of any interest in the real estate, with
exceptions for intra-family transfers of their home.
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32. b – A previously recorded trust deed containing standard clauses is a fictitious trust deed.
33. a – Another name for economic rent is market rent. Given that information, answer choice
A seems more obvious. Also, note the length of the answer and the degree of detail used in the
answer, which is also an indication that it is likely correct.
34. a – A government building would demand a lower capitalization rate (cap rate) than a
used car lot. Cap rates move in the same direction as risk and create a change of value opposite
to their direction. Thus, a higher risk, such as in the case of a used car lot, will require a greater
return on investment (i.e., a higher cap rate) and a lower value.
35. d – This is a NOT question. Physical deterioration (wear and tear) is not obsolescence.
Obsolescence is most often seen as items that are out of style or out of date. In a neighborhood,
it is something that reduces value, such as a changed flight pattern.
36. c – The difference between cost and value is described as depreciation. Accumulated
depreciation over time is called accrued depreciation.
37. c – This is a NOT question. The best answer is C. confidential pricing information. Material
facts, the name of the other principals and broker fees charged may be released by a dual agent.
38. b – Dual agency requires an immediate disclosure as soon as it occurs. This is a question that
may be asked in various forms. Certainly answer choice A. after escrow closes and D. any
time prior to the close of escrow are inappropriate. C. before the parties meet makes little
sense since the principals rarely meet.
39. b – An agent is an individual who represents another, called a principal. Both salespersons
and brokers are agents. However, the representation of a salesperson is indirect since they
represent their employing broker who then represents the principal.
40. b – This is an opportunity to be reminded that agency is something agreed to between a broker
and a principal. The membership in a trade group or union has nothing to do with it.
41. a – A license can be revoked; an easement cannot. Consider the common sign by a railroad
crossing stating, “Permission to pass by license, revocable at any time.”
42. a – The Energy Efficient Ratio (ERR) rating is listed on newer heating and air conditioning
units. Superior ratings earn the product an energy star label.
43. c – Utility easements are classified as easements in gross. An easement in gross is an easement
which belongs to an individual and is not appurtenant to or transferred with a property.
44. a – The list of requirements to gain a prescriptive easement includes the requirement to use
the property for a period in excess of five years without a claim of ownership. One does not
need to live on a property or physically confront the owner to acquire a prescriptive easement.
45. b – If interior walls and the inside of the exterior walls have a similar temperature, this indicates
the insulation is sufficient. When reading the question carefully, notice nothing is said about
windows and doors, precluding answer selection A. Answer choice C and D are possible, but
the intent of the question is to recognize the value of insulation.
46. c – Constructive notice is a matter of recording a document or something that is visually
obvious. Actual notice requires personal delivery by mail or in person.
47. b – The calculation requires adding 10% to the value after each year: $300,000 + 30,000 = $330,000
(yr.1); $330,000 + $33,000 = $363,000 (yr. 2); $363,000 + $36,300 = $399,300 (yr. 3).
48. a – A salesperson is ALWAYS directly responsible to their employing broker.
49. c – An express agency can be oral or written, but in either case is stated and mutually agreed
to. An implied or ostensible agency is not stated orally or in writing. Therefore, a listing, whether
open or exclusive, is an express agency.
244 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
50. b – A counteroffer constitutes an entirely new offer, which rejects and voids the original offer.
An offer is either accepted in its entirety or voided by rejection.
51. a – The correct answer is A. define the problem, gather the data, analyze the data,
reconcile the results, reach a conclusion. Answer selection B has the correct order but
lacks several steps, and is thus not the best choice. Answer choices C and D are not in the correct
sequence and lack various steps.
52. d – All of the answer selections will have an impact on the future real estate market, although
weather exerts the least amount of direct influence.
53. a – The nature of the adjoining auto salvage auto yard will lead the appraiser to recommend a
toxic waste study. An auto salvage yard has the potential of emitting hazardous wastes into
the neighboring property being appraised, and thus a toxic waste study is advisable.
54. d – Both answer selection A. novation and C. substitution of liability amount to the
same thing. A novation agreement entered into by a mortgage holder, buyer and seller will
substitute liability for a mortgage obligation to the buyer by an assumption.
55. d – The Real Estate Settlement Procedures Act (RESPA) mandates lenders disclose all
mortgage related charges on mortgages used to purchase, refinance or improve one-to-four
unit residential properties. RESPA is currently administered and enforced by the Consumer
Financial Protection Bureau (CFPB), though was previously overseen by the Department
of Housing and Urban Development (HUD).
56. b – Property is probated in the state where it is located regardless of the owner’s residency or
place of death.
57. b – The “et” in Latin is “ and;” “ux” means wife or spouse.
58. d – All property disclosures are ultimately the responsibility of the seller.
59. a – Note the question states “applies only.” Since most disclosures refer to one-to-four unit
residential properties and it is only necessary in known earthquake zones, answer selection
A is most appropriate. Choices B and C are only partially correct, and D is irrelevant since there
are no structures on unimproved properties.
60. b – Discriminatory practices are never allowable. The correct answer recognizes that a seller
can restrict showings only if they are not discriminatory in nature, such as the requirement to
show their property only when they are in town. Here’s a great example of how Fair Housing
laws need to be addressed with sellers and how buyers need to be respected.
61. a – Prohibiting prepayment under a land sales contract is unenforceable after the first 12
months following the sale. With both land sales contracts and trust deed loans, there are limits
on how long a lender can penalize a borrower for prepayment of the loan.
62. d – The seller of real estate is the “-or” person. The only suitable answer choice is D. vendor. The
principals in a land sales contract are referred to as vendor and vendee because the transfer
involves a contract of sale – think of a vendor in a ballpark or a vending machine.
63. a – As a matter of public protection, agents need to state their license number on all contracts,
marketing pieces and points of contact with the public. It does not need to be displayed within
a licensee’s car, even if the car is used for business purposes.
64. b – Only licensed or certified appraisers may generate an appraisal report. Therefore, to
formally conduct an appraisal, the broker needs to acquire the appropriate license under the
California Bureau of Real Estate Appraisers (CalBREA).
65. d – The California Rumford Act may carry potential penalties for discrimination violations,
including being forced to sell or lease the property to the aggrieved person, locating a similar
property for them or civil penalties up to $10,000.
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66. b – This question presents an opportunity to treat the question logically. Answer choices C
and D are unrealistic and outside of the duties of the seller’s listing agent. Answer choice A
is a concern of the title company and not the responsibility of the seller’s agent. Only answer
selection B makes logical sense as it fulfills the listing agent’s general duty to the buyer.
67. d – The Real Estate Commissioner’s goal is to create an industry that is color blind. Both
choices A and B are reasonable descriptions of what is expected of agents with this primary goal
in mind. Answer choice C is clearly wrong as it speaks to a time in the past when segregation
was acceptable. Thus, answer selection D is the best answer.
68. a – Title VIII, also known as the Federal Fair Housing Act, concerns the 1968 Civil Rights
Act. Answer selection C. Civil Rights Act of 1964 relates to voter rights. Answer selections B.
Unruh Act and D. Rumford Act are California laws, not federal.
69. a – The seller has the right to refuse to see offers that do not meet a certain criteria, such as
a minimum price requirement. However, the agent is best served by documenting this
stipulation in writing from the seller.
70. a – A salesperson may be an independent contractor for tax purposes, but they are an
employee of the broker under labor and real estate law.
71. b – A nonexistent grantee is likely an unlawful attempt by the grantor to hide an asset. Thus,
a deed which transfers ownership to a nonexistent grantee is void as the purpose is unlawful.
Fictitious names frequently have a reasonable and legal purpose, and thus answer selections
A and C cannot be correct. A deed is obtained through false representations is voidable, but
not void at its inception.
72. c – A deed is a written instrument which, when signed and delivered (executed), conveys
title to real property from one person (grantor) to another (grantee). Listings are employment
contracts. Mortgages are loan contracts. A land sales contract is a contract by name.
73. d – The adjusted cost basis of a personal residence is a number developed for income tax
purposes. It requires adding the cost of any improvements made to the property to the original
cost paid. Answer selection C. is only correct for non-personal residences. Note there is no
depreciation allowance for a personal residence.
74. d – The amount of the fee a hard money lender may charge is controlled by the Business and
Professions Code. The total fee is limited based on the length of the loan term, whether it is a
first trust deed or junior mortgage, and the amount of the loan. On a junior trust deed and note,
the maximum commission for a term less than two years is 5%; for a term of two years but less
than three years, the maximum is 10%; and for a term three years or greater, the maximum is
15%.
75. d – The utility of the land, condition of the improvements, and the bundle of rights all have
significance and will likely affect an appraiser’s final valuation of a property. The original cost
of the property has no effect on the current value of the property.
76. b – When representing both principals in the same transaction, the agent is acting as a dual
agent.
77. a – Fiduciary duty is the ultimate responsibility owed by the agent in an agency relationship.
Among the alternative answer choices, C. duty free can be easily dismissed as being contrary
to public policy, and D. sub-agency duty can be similarly dismissed since the question
implies greater care. Answer selection B. general duty is the duty of honesty and fair dealing
owed to other parties in the transaction.
78. a – Failure to provide the seller with the Agency Law Disclosure prior to signing a listing
may result in the loss of the brokerage fee if the client wishes to avoid payment of the fee.
246 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
79. b – The Agency Law Disclosure applies to a purchase agreement offer and acceptance. The
other answer selections are exceptions.
80. c – If an owner suffers a loss due to fraudulent misrepresentation by their broker, the owner’s
first action is to sue the broker. Money losses can only be recovered from the Real Estate
Recovery Fund after successfully winning a judgment against the broker and being unable
to collect from them.
81. a – This is an EXCEPT question. Answer selection A. preparing a pro forma is optional
and up to the discretion of the agent. It is not a stated requirement under Agency Law. This
question offers an opportunity to note some of the duties of an agent while also recognizing
the limits of responsibility.
82. a – An easement created by deed cannot be voided by nonuse. None of the alternative answer
selections are reasonable — a servient tenement has no authority to void an easement.
83. b – An agent needs to obtain consent from all principals to act as a dual agent. This answer
can be logically arrived at through elimination. There is no such thing as a unique “dual role
license.” The Department of Justice (DOJ) is not an entity generally involved with the oversight
of real estate activity. A real estate trade union has no authority to make such dual agency
decisions on behalf of real estate participants.
84. c – A dominant tenement benefits from an easement; a servient tenement suffers from an
easement.
85. b – The word encumbrance may imply a debt. However, it may also be another type of
burden, such as a lease or an easement.
86. d – An easement is the specific right to use land, but is not an estate. Alternatively, a leasehold
is an estate. A remainder in interest will become an estate when realized. Riparian rights do not
include the use of land but the water flowing over or under land, and thus are not applicable
to this question.
87. d – There is no limit to the length of time granted for an easement. An easement can be limited
to an agreed-to period of time, or exist for perpetuity.
88. d – Appropriation is the action of taking something for one’s own use, such as water from a
stream. This question provides a reminder to refer to the glossary at the back of the book and
consider any of the terms you are unfamiliar with.
89. c – A condition precedent is a provision in an agreement calling for the occurrence of an
event or performance of an act before a person is required to further perform or an act is to
occur. In the context of this question, the condition precedent is that Matt marries before title
to the family estate will transfer to him. A condition subsequent is the opposite, such as a
reversionary transfer after a divorce occurs.
90. d – All common elements in a condominium belong to the homeowners’ association (HOA),
not the individual owners, and are thus the responsibility of the HOA.
91. a – The failure to disclose the agency relationship at the earliest available opportunity puts
the agent’s fee at risk.
92. d – An agent needs to represent someone other than themselves in order for an agency role to
exist. It may occur with the buyer, seller, or both (a dual agency). An agent acting on their
own account is acting as a principal, not an agent of themselves.
93. c – Fiduciary is a matter of utmost trust and loyalty. This is most closely associated with the
relationship between a trustee and the beneficiary.
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94. c – Of the choices offered, only a U.S. Department of Veterans Administration (VA)
guaranteed loan is required to have an appraisal to justify the agreed-to sales price/loan
amount. Consider the alternative answers: if mortgage financing is not needed, an appraisal
is likely unwarranted, precluding answer choices A and D from being correct. In the instance
of a new subdivision, as is the case with answer selection B, the lender typically commits to
funding all completed sales transactions as part of the loan package agreed to when the land
was acquired. Provided the buyer’s credit is adequate, no further appraisal is required.
95. d – Answer selection D. Demand, utility, scarcity and transferability is known as the
elements of value (DUST). Answer selection A fails since, while many may have the desire
to own a home, they may not have the financial capacity. Both choices B and C refer to cost,
which is not a consideration in the elements of value.
96. d – 27 ½ years is the basis for depreciation under the IRS tax code, and is thus the general
economic life of a frame dwelling.
97. a – Capitalization is the process to convert future income into a present value. To do this,
an appropriate capitalization rate (cap rate) needs to be determined. The cap rate is calculated
by dividing the net operating income by the price asked or offered for income property.
98. d – Using what you know about trust deed financing, the only answer choice that is not
flawed is D. Trust deeds represent the security for a note and do not transfer equitable title.
There are three parties to a trust deed: trustor (borrower), beneficiary (lender) and trustee (holder
of naked title). There is no automatic recording of a release of title.
99. a – A bona fide purchaser is a buyer who lacks knowledge the property they are buying is
the subject of a sale to another buyer, and purchases the property for valuable consideration.
A bona fide purchaser needs to have made a good faith effort to discover the existence of the
previous transfer. If there is no reasonable way for the second buyer to have known and be put
on constructive notice, they will be given title to the property when they record their deed.
100. d – The primary purposes of a deed is to give evidence of a change in title. In order for the
deed to provide constructive notice, it needs to be recorded. While answer choice C is correct,
it is not the primary purpose of the deed.
101. c – The key to any “as is” question is the need for disclosure of all known material facts.
Provided the buyer is made aware of the problems, it is acceptable to sell the property on that
basis. Thus, a property sold “as is” is really sold “as disclosed.”
102. a – The existence of a military installation needs to be disclosed if it is located within one
mile of the subject property.
103. a – If a residential landlord under a rental agreement seeks to increase rent in an amount less
than 10%, a 30-day notice is required.
104. b – An exclusive right to sell listing requires the seller to pay a broker fee when a property
is sold regardless of who sells it. The guarantee of a commission only comes with an exclusive
listing (answer choices B and D). However, answer selection D. An exclusive agency listing
allows the seller to personally sell their property without being obligated to pay the broker a
fee.
105. c – If both the seller and broker fail to disclose known material facts negatively affecting the
property, both will be held responsible.
106. a – The Interstate Land Sales Act gives the buyer a three business day right of rescission.
107. a – Under the Statute of Frauds, a real estate contract, such as a land sales contract or listing,
needs to be written to be enforceable.
248 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
108. d – If a seller rejects a submitted offer due to the buyer’s race, all of the answer selections apply.
The broker owes their client seller a fiduciary duty to advise them of the risks inherent in
violating fair housing laws. Further, the broker owes a general duty to the buyer to advise them
of their rights under the law. Finally, the broker may sue the seller for the earned commission
having brought a valid offer to the seller. As a matter of practice, the broker will want to be on
record as being opposed to the seller’s discriminatory actions.
109. a – Use of the expression “adults only” in advertising constitutes age discrimination. The
only allowable age discrimination is senior housing.
110. a – This is an EXCEPT question. As a listing agent, the broker cannot solely represent the
buyer under a single agency. They may represent the seller, or both the buyer and seller
under a dual agency, but not the buyer exclusively.
111. a – How a house is placed on a lot is referred to as its orientation. A house is orientated in a
specific manner to best capture sunlight, be sheltered from winds or enjoy a specific view.
112. d – The right to use land without an estate interest is called an easement.
113. c – An easement does not need to specify a location in order to be valid. For example, an
easement in gross held by a utility company does not specify a location.
114. c – Functional obsolescence is a loss of value due to adverse factors within the structure
which affect the utility of the structure, and thus its value and marketability. Only choice
C. no air conditioning in a building located in an arid, desert environment fits this
definition. Answer choice D refers to physical deterioration. Answer choices A and B are located
off the property and are out of the control of the owner, both being examples of economic
obsolescence.
115. a – Pre-tax gross income will always be greater than post-tax net income – just like with a
paycheck. Scheduled gross income is the amount that is charged to the tenants. Gross
operating income is a lesser amount as it is the scheduled gross income minus vacant
rentals and delinquent payments. Net spendable income is developed by subtracting both the
mortgage payment and income taxes from the net operating income.
116. a – The gross rent multiplier (GRM) is determined by dividing the property’s sales price by
the gross scheduled rent. When the GRM is multiplied by the gross income of a property, it
produces an estimate of the property’s value. Each of the alternative answer choices includes
other elements that are not part of this GRM formula.
117. b – Only answer selection B. loan assumption fees are classified as finance charges. The key
words in the question are “finance charges.” All the alternative answer selections are expenses
involved in originating a loan.
118. c – A mortgage can be resold to an investor after it is originated. In order to convert a future
income stream into cash, the lender needs to “discount” its value. In other words, a dollar in
the future may be worth eighty cents cash today.
119. b – The Federal Reserve (the Fed) can require larger reserves for member banks and sell
government bonds to reduce the amount of cash in circulation. This is known as tight
monetary policy.
120. b – The Franchise Investment Law is a public protection for a franchisee, the buyer of the
franchise. Laws such as this are designed to protect the buying public.
121. a – A tenant at sufferance is a tenant who remains in possession of a property after their
right to possession has expired. As a tenant is not an equity owner in the property, answer
selections B and C (and thus D) cannot be correct.
Simulated Exam #3 249
122. d – A surrender is a mutual cancellation of a lease agreement by the landlord and the tenant.
Answer selection C applies to changes in rental terms, which does not relate to the question.
Answer choices A and B are notices the lessor would post to begin the process of terminating
the lease.
123. b – The scenario in the question illustrates an express, bilateral, executory, employment
contract. The listing in the question creates an express agreement and is bilateral – a promise
for a promise. The listing contract will not be fully executed until the property is sold and
escrow is closed. Thus, the contract in question is also executory.
124. b –A mortgage requires a judicial foreclosure and thus offers the greatest protection as
the owner is provided a longer period of time to cure the default. A trust deed is generally
foreclosed through a nonjudicial trustee’s sale, which can occur more quickly and provide
little opportunity for the owner to cure the default. A land sales contract is a quiet title court
process, and a default on a fixed-term lease with an option to buy is remedied with an unlawful
detainer action, both of which are relatively short and simple legal processes.
125. d – Be careful! The unadjusted basis is the original cost of the property. One is generally asked
to identify the adjusted basis, which is the original cost of a property plus improvements
minus depreciation. This value is required for capital gains tax purposes. However, this
question is looking for the unadjusted basis.
126. d – With seller carryback financing, the seller (as the mortgage holder) will normally pursue
a nonjudicial trustee’s sale to foreclose on the loan. A trustee’s sale provides the borrower 90
days to redeem the property by paying the default before the sale procedure begins.
127. a – This advertising requirement question relates to what is called a “blind ad.” Today, a
broker is required to state their DRE license number on any marketing material and points
of contact with the public.
128. d – This is a NOT question. All of the answer selections distinguish a license from a lease. A
license does not provide for the payment of rent, has an open-ended duration, and does
not include the right to exclude others from entry, such as a public license to cross railroad
tracks.
129. a – This is a NOT question. A lease does not require the signature of the owner, only the
tenant. Regardless of the length of time, a lease needs to have a termination date (unlike a
rental agreement) and a description of the property. Further, the lease needs to be in writing to
be enforceable if it is for a term greater than one year.
130. c –The broker has a fiduciary duty to their client to inform them of the legal ramifications of
discrimination. All the alternative selections are clear violations of fair housing laws.
131. d – The public policy goal behind fair housing laws is that licensees treat everyone equally.
Simply stated, it is a color blind philosophy.
132. d – A salesperson and their broker may be found guilty of fraud if they make a prediction about
the future represented as fact, which later turns out to be incorrect. If the buyer accepted the
salesperson’s statement as fact, there are legal consequences. Thus, answer selection A cannot
be correct. The definitive representation that the property’s value will double in three years
rises beyond puffing, and thus B is also not correct. Answer choice C suggests the responsibility
will apply only to the broker, which is not the case.
133. a – The full name for a prescription is a prescriptive easement. A prescriptive easement is
the right to use another’s property established by the adverse use of the property for a period in
excess of five years without a claim of ownership. This is neither a grant or legal title, nor does
it cloud the title of the benefiting property. A prescriptive easement does, however, give the
right to use land to someone other than the owner.
250 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
147. a – An assignee is the individual to whom property or interests have been transferred. The
assignor is the individual who assigns or transfers the rights or interests they hold in personal
or real property. The choices offered are based on “vend” and “assign.” Vending is a sale –
specifically a land sales contract – and therefore not applicable to a lease.
148. d – Oral agreements between brokers to split commissions are valid and enforceable.
149. a – When a vendee under a land sales contract makes payments which include an impound
for taxes, the monies need to be held in a trust account. Answer selections A and C are similar,
although C allows the funds to be kept anywhere so long as they are not converted, which is
not correct. Answer selection D is unreasonable since most sellers under a land sales contract
will not be licensed, and thus the Department of Real Estate (DRE) is not involved. Choice B
suggests conversion is acceptable, which is not correct.
150. a – A lease is an exclusive right of possession. Typically, all adult persons will be named on
the lease, and thus it is not personal. Further, a lease is revocable based on a tenant’s improper
behavior, such as committing waste to the property.
Notes:
Simulated Exam #4 253
SIMULATED EXAM #4
1. May a street address be used as a legal description on documents used in a real estate sale
transaction?
a. Yes, a street address is acceptable, but it may make it difficult to get a loan on the
property.
b. No, a street address is not a legal description of the property.
c. A street address is acceptable for most purposes, but title insurers may choose not to
insure the property.
d. It is always an adequate means of description.
2. All of the following are examples of personal property, except:
a. An appurtenant easement. c. A trade fixture.
b. A leasehold interest in real estate. d. An automobile or boat.
3. Which of the following normally installs conduits over the course of their professional practice?
a. Roofers. c. Electricians.
b. Carpenters. d. Plumbers.
4. An example of involuntary alienation is a(n):
a. zoning restriction. c. eminent domain action.
b. easement by reservation. d. escheat.
5. The SW 1/4 of the N 1/2 of section 12 contains how many acres?
a. 160. c. 40.
b. 80. d. 320.
6. A listing broker may be the sole agent of the seller or:
a. the sole agent of the buyer.
b. a dual agent of both the seller and the buyer.
c. a dual agent of both the lender and the buyer.
d. a dual agent of the both the seller and the buyer’s broker.
7. A broker represents only the lessee in a commercial lease. This is an example of a(n):
a. general agency. c. dual agency.
b. implied agency. d. single agency.
8. The appraisal method that estimates the cost of all labor and materials in construction is the:
a. comparison method. c. quantity survey method.
b. unit-in-place method. d. capitalization method.
9. If the eventual highest and best use of a parcel of real estate cannot be realized for a period of
time, the current use is referred to as the:
a. temporary use. c. less than highest and best use.
b. current use. d. interim use.
10. When appraising a building which operates as a restaurant, an appraiser likely uses the:
a. market data approach. c. reproduction cost approach.
b. replacement cost approach. d. income approach.
254 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
11. In estimating the value of Fran’s single family residence (SFR), the appraiser uses the same
gross rent multiplier (GRM) that has been computed for comparable properties in the same
neighborhood. The comparable properties generate a rental amount of $3,000 per month and
were recently sold for an average of $450,000. The owner’s property currently generates $3,200
per month in rent. The estimated value of the subject property is:
a. $450,000. c. $510,000.
b. $480,000. d. $540,000.
12. Rental schedules for apartments are realistically established on what basis?
a. The cost to build the property.
b. The number of occupants a property can house.
c. A market comparison of similar apartments.
d. Rental data published in the local newspaper.
13. What is the maximum fee a Real Estate Settlement Procedures Act (RESPA)-controlled lender
may charge to a borrower for the preparation of mandatory disclosures?
a. 0.5% of loan amount. c. $100.00 for jumbo loans.
b. $25.00. d. Nothing.
14. A large down payment on real estate generally does not:
a. reduce the risk of default for the lender.
b. improve the terms of the loan for the borrower.
c. promote more stable ownership.
d. reduce the amount of equity an owner holds in their property.
15. Who pays mortgage insurance premiums (MIPs)?
a. The buyer under a U.S. Department of Veterans Administration (VA)-guaranteed loan.
b. The buyer under a Fannie Mae, Ginnie Mae or Freddie Mac approved loan.
c. The buyer under a Federal Housing Administration (FHA)-insured loan.
d. The buyer under a private mortgage insurer.
16. The Federal Housing Administration (FHA) loan fee can be paid by the:
a. Escrow officer. c. buyer.
b. seller. d. Either b. or c.
17. The relationship between an escrow officer and the parties to a real estate transaction is usually
described as which of the following?
a. An employee. c. A mediator.
b. A facilitator. d. A neutral agent.
18. Which of the following positions requires the most advanced knowledge of accounting
procedures?
a. An escrow officer. c. A real estate broker.
b. A real estate salesperson. d. An appraiser.
19. The Escrow Law is contained in the:
a. Real Estate Law. c. Civil Code.
b. Business and Professions Code. d. California Financial Code.
20. If a prior occupant died on the real estate more than prior to a buyer’s
purchase, the seller’s agent has no affirmative duty to voluntarily disclose the death to the
buyer.
a. six months c. three years
b. one year d. five years
Simulated Exam #4 255
21. In which of the following years did the U.S. Supreme Court prohibit all racial discrimination in
the sale or lease of real property?
a. 1968. c. 1959.
b. 1964. d. 1955.
22. The U.S. Attorney General acts to enforce federal open housing laws whenever:
a. state regulations are not properly upheld by state officials.
b. a conspiracy exists to undermine federal open housing laws.
c. a complaint filed involves more than four units.
d. a complaint filed involves less than four units.
23. When renting residential property, the amount of a deposit a lessor may legally receive from a
lessee is determined in part by which of the following:
a. the size of the rental.
b. whether the unit is furnished.
c. competition from other apartment buildings in the area.
d. the number of tenants who will occupy the rental.
24. The total security deposit allowable for an unfurnished residential unit may not exceed:
a. one month’s rent. c. three months’ rent.
b. two months’ rent. d. $1,000.
25. In May, 2018, Wayne leased a unit in his apartment complex to a tenant under a two-year
lease. The tenant prepaid the last two months’ rent when they entered into the lease. For
federal income tax purposes, the prepaid rent is considered as income for Wayne:
a. in May, 2018.
b. in May, 2020.
c. that is “held in trust” until it is due.
d. only when it is used as current rent.
26. All of the following are duties of a property manager, except:
a. collecting rents. c. arranging repairs.
b. showing vacant units. d. preparing depreciation schedules for
owners.
27. The Real Estate Law is part of:
a. the Corporation Code. c. the Statute of Limitations.
b. the Business and Professions Code. d. Code of Civil Procedures.
28. A subdivider needs to give a copy of the final public report to a buyer and obtain a receipt from
the buyer before entering into a binding contract. How long does the subdivider or their agent
need to keep a copy of the receipt for the final public report?
a. One year. c. Five years.
b. Three years. d. Eight years.
29. A voidable contract remains binding upon the parties until the contract is:
a. voided. c. determined to be legal.
b. rescinded. d. unqualified.
30. When coercion or duress are applied to a party in a contract, the contract is:
a. void. c. illegal.
b. voidable. d. unenforceable.
256 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
31. The effective date for a residential purchase agreement is the date:
a. the deposit was given to the seller by the buyer.
b. the contract was written.
c. the buyer signed the contract.
d. the seller’s acceptance of the offer was properly communicated to the buyer.
32. A contract for the sale of rural property requires a:
a. rural mailing address. c. legal description.
b. county assessor parcel number. d. reference to the size of the parcel.
33. An offer to purchase real property was signed by a prospective buyer on November 12 and
submitted to the seller. The terms of the offer allow five days for acceptance by the seller. Due
to a medical emergency in the seller’s family, the seller did not accept the offer until November
20. Which of the following statements is true?
a. The buyer may demand a return of their deposit.
b. The buyer is required to continue with the purchase since they did not withdraw their
offer prior to acceptance.
c. The buyer is in breach of the contract if they refuse to continue with the purchase.
d. If the buyer does not complete the purchase as agreed, the seller and the broker are each
entitled to one-half of the deposit.
34. All of the following is true in a sale-leaseback transaction, except:
a. The seller stays in physical possession of the property.
b. The seller guarantees the buyer’s performance of the loan.
c. The seller receives a capital contribution for their business.
d. The seller becomes a tenant in the property.
35. When a buyer purchases property without being informed it is on a septic system, the buyer
may:
a. report the seller to the Department of Real Estate (DRE).
b. rescind the contract.
c. demand the sewer be connected to the property.
d. file a complaint with the local utilities.
36. All of the following are examples of a void deed, except:
a. A forged deed.
b. A deed signed and delivered by a seller under the age of 18.
c. A deed obtained through undue influence or threat.
d. A deed materially altered without the grantor’s consent.
37. A real estate license was issued for only 150 days. The reason for this shortened license period
was that the licensee:
a. was in arrears for child support payments.
b. did not fulfill all of their educational requirements.
c. is in a divorce suit.
d. is a foreign national.
38. A property management agreement does not authorize a property manager to:
a. locate tenants. c. collect rents.
b. enter into rental and lease agreements. d. oversee costly repair projects.
Simulated Exam #4 257
39. Consider a seller who carries back a note secured by a deed of trust. If a loan broker takes on the
duty of collection, state law requires them to:
a. deliver a broker’s loan statement to the note holder.
b. post a bond.
c. have written authorization from the holder of the note to service the loan.
d. deposit the funds in a separate trust account.
40. A(n) __________ is a statement made by a broker concerning a possible condition which has
not yet occurred based on readily available facts.
a. fact c. guarantee
b. opinion d. assurance
41. A shoe factory is being built that will employ mostly women. A broker who manages nearby
apartment buildings instructs their employees to direct their advertising to married women
without children and charge more rent to certain minority groups. Are either of these practices
in violation of the fair housing laws?
a. Directing advertising to married women without children is a violation of fair housing
laws.
b. Charging certain ethnic groups a higher rate is a violation of fair housing laws.
c. Both a. and b.
d. Neither a. nor b.
42. Under the provisions of the federal Fair Housing Law, aggrieved persons who have been
discriminated against in their acquisition of housing may file a:
a. civil action in federal courts.
b. civil action in state or local courts.
c. complaint with the Department of Housing and Urban Development (HUD).
d. Any of the above.
43. If a dispute arises during escrow between the buyer and seller preventing the close of escrow,
the escrow agent may:
a. cancel the escrow. c. arbitrate the dispute.
b. file an interpleader action. d. use their discretion to resolve the issue.
44. If the state acquires title to an owner’s property by escheat, how long must it wait before
disposing it?
a. No holding period is required. c. Five years.
b. One year. d. Seven years.
45. Rental housing loans can be insured or guaranteed through:
a. the Federal Housing Administration (FHA).
b. CalVET.
c. California Housing Finance Agency (CALHFA).
d. the American Land Title Association.
46. Rental income minus operating expenses, debt service and income tax payments equals:
a. gross operating income. c. net spendable income.
b. net operating income. d. the return of investment.
258 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
47. By dividing the net operating income (NOI) generated by an income-producing property by
the price paid or offered for a property, a buyer can determine the:
a. capitalization rate (cap rate). c. gross rent multiplier (GRM).
b. net spendable income. d. capital basis.
48. When using the replacement cost method of appraisal, the appraiser calculates all of the
following, except:
a. the land value.
b. the cost to build the improvements on the property.
c. the capitalization rate (cap rate).
d. accrued depreciation.
49. A salesperson who works for a broker who dies:
a. may continue working for up to 60 days or until another broker takes over the office.
b. needs to close escrow on all pending transactions.
c. may continue working if there is an office manager appointed by the broker with two
years of management experience within the last five years.
d. needs to stop real estate activity immediately.
50. All of the following transactions do NOT require compliance with the agency law, except:
a. The sale of a single family residence sold independently by the owner.
b. Upon the entry into a three-year lease arranged by a broker on a residential property.
c. On the sale of a five-unit residential building that is sold by a licensed broker.
d. Both b. and c
51. The selling agent presents their buyer’s offer to the seller. When is the best time for the agent to
give the seller the Agency Law Disclosure form?
a. On the opening of escrow. c. After presenting the offer to the seller.
b. Before the seller signs the offer. d. As soon as practicable.
52. In addition to a fiduciary duty owed to the client in a transaction, a salesperson owes a(n)
to act with good faith and honesty towards the opposing party.
a. partial duty c. legislative duty
b. general duty d. gratuitous duty
53. A real estate agent needs to confirm their agency relationship:
a. as soon as practicable.
b. before escrow closes.
c. as soon as escrow opens.
d. whenever asked by either party in the transaction.
54. All of the following are examples of a possible agency relationship in California, except:
a. Single agent. c. Dual agent.
b. Implicit agent. d. Secret agent.
55. The creation of an agency requires:
a. express agreement. c. subornation.
b. consideration. d. None of the above.
56. All of the following are encumbrances, except:
a. A lease. c. A mechanic’s lien.
b. A homestead. d. A mortgage.
Simulated Exam #4 259
67. The first thing an appraiser does when appraising vacant land is determine:
a. the fertility of the soil under the property.
b. zoning laws which affect the use of the property.
c. comparable sales prices of other vacant land.
d. the highest and best use of the land.
68. The time period during which a building produces income that can be attributed to the building
itself is known as:
a. physical life. c. actual age.
b. economic life. d. effective age.
69. All of the following are required when a trust deed is paid in full, except:
a. The trustor’s signature. c. A deed of reconveyance.
b. The trustee’s signature. d. Both a. and b.
70. The interest rate on a Federal Housing Administration (FHA)-insured loan is set by:
a. Fannie Mae. c. Ginnie Mae.
b. FHA. d. negotiation between the lender and
borrower.
71. All of the following are methods by which an individual may take title to real property, except:
a. Deed. c. Escheat.
b. Prescription. d. Intestate succession.
72. Escrow can legally prepare or do which of the following activities?
a. Act as a mediator when there is a dispute between the buyer and the seller.
b. Draft escrow instructions and the grant deed.
c. Decide when escrow will close without the consent of the buyer and seller.
d. Structure a wraparound trust deed.
73. An escrow officer may do which of the following when real property is being escrowed?
a. Settle a disagreement regarding the escrow instructions between the buyer and seller.
b. Accept written instructions from the seller and buyer to change the price and terms
without the approval of any broker.
c. Cancel the escrow if the buyer doesn’t perform in a timely manner.
d. Recommend amended escrow instructions which contain a blank to be filled in after
signing.
74. All of the following are legally proper for a licensee to do, except:
a. Puffing.
b. Enter into a pocket listing with the seller’s approval.
c. To show a property only when its flaw would not be obvious.
d. Keep a client’s secret that the roof leaks.
75. A real estate broker may legally negotiate the sale of any:
a. new mobile home.
b. registered mobile home.
c. mobile home that is 32 feet in length or longer.
d. mobile home that is situated in a mobile home park.
Simulated Exam #4 261
76. The inside of a building is 60 ft. by 90 ft. and the walls on each side are 6 inches thick. What is
the external total square footage?
a. 5,400 sq. ft. c. 4,951 sq. ft.
b. 5,551 sq. ft. d. 4,800 sq. ft.
77. On January 1, 1987, which of the following real estate disclosure laws went into effect?
a. The Agency Law Disclosure.
b. The Seller Financing Disclosure.
c. The Transfer Disclosure Statement (TDS).
d. The Real Estate Settlement Procedures Act (RESPA).
78. Which of the following needs to be in writing to be enforceable under the Statute of Frauds?
a. A lease with a one-year term.
b. A lease listing agreement with a one-year term.
c. A partnership agreement.
d. A contract which is to be performed greater than one year after it is entered into.
79. Under the Statute of Limitations, a buyer needs to bring a lawsuit for breach of written contract
against a seller within:
a. six months. c. four years.
b. three years. d. five years.
80. A seller accepts a written offer to purchase their property. Later, the seller refuses to perform to
complete the transaction. Under the Statute of Limitations, the buyer needs to file a civil action
due to the seller’s breach of a written contract within:
a. one year from the seller’s breach. c. four years from the seller’s breach.
b. one year from when the buyer signs. d. four years from when the buyer signs.
81. Broker Francis shows multiple houses he is listing to Buyer Marc and Sally Taylor, a married
couple. The buyers do not like any of the properties. When Buyer Marc is away, Broker Francis
shows a different house to Buyer Sally individually. Buyer Sally likes the property and submits
an offer to the seller with a deposit. Who is the purchase offer submitted from?
a. Sally Taylor.
b. Marc and Sally Taylor.
c. Marc Taylor himself as head of household.
d. None of the above as the offer is invalid since a married person cannot make an offer
individually.
82. Syndi owns a 50 unit apartment building managed by Scott, a licensed real estate broker.
Angela lives in the building and has been designated as the resident property manager. Who
has the ultimate responsibility for the inspection and maintenance of the building?
a. Angela. c. Scott.
b. Syndi. d. All parties are equally responsible.
83. A tenant leases a unit in an apartment complex. The owner later sells the building to a new
owner. The new owner:
a. may force an immediate payoff of the lease.
b. may increase the security deposit.
c. may raise the rent.
d. needs to honor the existing lease contract.
262 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
120. The commission of a leasing agent is generally based upon a percentage of:
a. the total operating costs incurred running the property.
b. the cash paid by a lessee at the time of signing the lease.
c. the total rent collected by the lessor over the term of the lease.
d. the prevailing commission rates commanded by similar brokers.
121. What is the maximum amount that may be paid from the Real Estate Recovery Fund?
a. $20,000. c. $100,000.
b. $40,000. d. $250,000.
122. When a counteroffer is made:
a. the original offer is void.
b. the original offeree is still the offeree.
c. the original offeror is still the offeror.
d. the original offer is considered accepted with the exceptions noted in the counteroffer.
123. The is the primary enforcer of anti-discrimination law in California.
a. Department of Housing and Urban Development (HUD)
b. Department of Fair Employment and Housing
c. Labor Commission.
d. Department of Business Oversight (DBO)
124. Which of the following is least likely to appear as a debit on a buyer’s closing statement?
a. Proration of property taxes.
b. Interest on a loan assumed by the buyer.
c. Discount points for a new Federal Housing Administration (FHA)-insured loan.
d. Homeowner’s insurance premiums.
125. All of the following are a dangerous gas, except:
a. Carbon dioxide. c. Formaldehyde.
b. Carbon monoxide. d. Radon.
126. Mr. and Mrs. Hartford are denied a home loan due to a credit report which contained incorrect
negative information. They sent corrective documentation into the credit reporting agency
which issued the report. If the credit reporting agency fails to correct the credit report, the
Hartfords may file a court action and seek:
a. attorney’s fees. c. court costs.
b. actual and punitive damages. d. All of the above.
127. The Federal National Mortgage Association (Fannie Mae) is active in
by securitizing mortgages into mortgage-backed securities.
a. the primary mortgage market c. CalVET financing
b. the secondary mortgage market d. low income housing
128. One year after the expiration of their real estate license, the licensee wishes to renew their
license. All of the following statements are correct, except:
a. They need to retake the state license examination.
b. They are required to fulfill the continuing education (CE) requirements.
c. The late renewal fee is higher than the on-time renewal fee.
d. They have a two-year grace period in which to renew their license.
Simulated Exam #4 267
129. Buyer Martin agreed in writing to purchase Seller William’s property for $365,000. The offer
was conditioned on Buyer Martin being able to obtain a U.S. Department of Veterans Affairs
(VA)-guaranteed loan for the purchase price secured by the subject property. Of the following,
which best represents Buyer Martin’s option under this purchase transaction?
a. If the $365,000 VA-guaranteed loan is not obtainable, Buyer Martin may renegotiate
the purchase contract on terms mutually agreeable to Buyer Martin and Seller William.
b. If the Certificate of Reasonable Value (CRV) is less than $365,000, Buyer Martin is
entitled to cancel the transaction.
c. If the CRV on the property is $350,000, the buyer may complete the purchase by making
an additional $15,000 down payment.
d. All of the above.
130. The sequential steps of the Agency Law Disclosure are:
a. disclose, elect, confirm. c. disclose, confirm, dissolve.
b. confirm, elect, disclose. d. disclose, confirm, elect.
131. A real estate agent may not represent all of the principals in a transaction if:
a. they have not obtained the consent of all parties to this agency relationship.
b. they have informed all principals they are acting as a dual agent.
c. they are collecting a commission from each principal with the knowledge of the others.
d. they also represent other clients in other unrelated transactions.
132. All of the following are true regarding easements, except:
a. Easements need to be recorded to be enforceable.
b. All easements are encumbrances, yet not all encumbrances are easements.
c. An easement doesn’t necessarily run forever.
d. All of the above.
133. In appraising a property with two bathrooms, the appraiser used a comparable property with
2 1/2 baths. The appraiser should:
a. add the cost of the half bath to the subject property.
b. deduct the cost of the half bath from the sale price of the comparable property.
c. disregard the difference since it is insignificant.
d. add the cost of the half bath to the comparable property.
134. All of the following are included in The Federal Reserve’s (the Fed’s) monetary tools, except:
a. raising interest rates on government-insured mortgages.
b. raising and lowering the discount rates to member banks.
c. adjusting the reserve requirements for banks.
d. buying and selling U.S. government bonds.
135. Which of the following is least likely to be a benefit of using Federal Housing
Administration (FHA)-insured financing?
a. A low down payment.
b. Minimum property requirements.
c. A long loan term which yields lower monthly payments.
d. Title does not transfer until the loan is fully repaid.
268 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
136. All of the following statements are false concerning typical escrow procedures, except:
a. Once escrow has closed, the escrow agency changes from a dual agency to a separate
agency of each principal.
b. The escrow officer may be an advocate for the best interests of both principals.
c. Once the escrow officer is in possession of a binding contract between the buyer and
seller, it is said to be a “complete escrow.”
d. The escrow officer can be an advisor to both the buyer and the seller.
137. All of the following landlord requirements are NOT a violation of fair housing laws, except:
a. Every tenant is to have a good credit rating and a steady source of income.
b. Every tenant is to provide positive references from their previous landlords.
c. Every unmarried tenant is to have a cosigner on the lease.
d. Every tenant is to pay the first and last month’s rent in advance.
138. A real estate salesperson maintained an active presence in a target community in an effort
to obtain listings. The salesperson told members of the community that property values in the
area were decreasing due to the entry of minority buyers into the neighborhood. This conduct
is:
a. not a violation of any legal or ethical standards.
b. permissible if the representations are true.
c. standard practice and acceptable behavior.
d. grounds for disciplinary action.
139. Appraising a multi-million dollar home in Beverly Hills requires a(n):
a. Certified Residential License. c. Certified General License.
b. Residential License. d. Either a. or c.
140. A(n) is a broker who simultaneously represents the best interest of opposing
parties in a transaction, e.g., both the buyer and the seller.
a. dual agent c. subagent
b. secret agent d. finder
141. The gross rent multiplier (GRM) is calculated by dividing the:
a. asking price of a residence by the adjusted gross rent.
b. listing price of a neighboring property by its operating expenses.
c. cost of the property amenities by the value of the raw land.
d. sales price by the gross monthly income.
142. The maximum potential income an income-producing property is capable of generating is
known as:
a. gross operating income. c. net operating income.
b. gross scheduled income. d. net spendable income.
143. When ordinary repairs are made to broken equipment in an income-producing property,
these repairs are classified as:
a. deferred maintenance. c. corrective maintenance.
b. preventive maintenance. d. property upgrades.
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150. All of the following terminates an existing offer to purchase real estate except:
a. when the buyer revokes the offer after the seller’s acceptance has been communicated.
b. the lapse of time as written in the offer.
c. submission of a counteroffer.
d. the death of the buyer before the seller’s acceptance has been communicated.
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14. d – With a higher down payment, there is less risk to the lender that the borrower will default
since the borrower has a greater equity stake in the property. A higher down payment will
lower the overall expense of mortgage interest for the buyer as the principal amount borrowed
will be lower. Further, higher down payments tend to promote more stable home ownership
as owners have “greater skin in the game” and more impetus to avoid default.
15. c – Mortgage insurance premiums (MIPs) refer to default insurance premiums required
on a Federal Housing Administration (FHA)-insured mortgage, paid both up-front and
annually. The U.S. Department of Veterans Affairs (VA) loans are guaranteed. The Federal
National Mortgage Association (Fannie Mae) loans require the payment of private mortgage
insurance (PMI).
16. d – The Federal Housing Administration (FHA) loan fee can be paid by either the buyer or
the seller. Market conditions and the agreement of the principals will dictate who pays.
17. d – The escrow officer is a neutral agent to the two principals during escrow.
18. a – Escrow officers are most similar to accountants in the nature of their assignment in a
transaction. Appraisal work is more analytical and brokerage practice is more concerned with
selling, people and relationships.
19. d – Escrow is guided by the California Financial Code. It is often an ancillary service of
banks and title insurance companies.
20. c – The time element for which a real estate agent has an affirmative duty to disclose a death
on the property is three years.
21. a – The 1968 Civil Rights Act is a federal law which provides broad protections to numerous
classes of individuals in the United States against discriminatory activities. The only other
answer selection that cites a date applicable to real estate is B. 1964, which was the enactment
of the Civil Rights Act primarily concerning voters’ rights.
22. b – The U.S. Attorney General becomes involved in enforcing Federal Open Housing Laws
when a conspiracy exists to undermine the laws. Answer selection C is too restrictive as it
is limited to complaints involving greater than four units (and thus D also cannot be correct).
Answer selection A fails since it calls for state regulations and the question concerns actions of
the federal government.
23. b – The only variation in the maximum security deposit allowable by law is whether the
apartment is furnished. A landlord may demand two months’ rent as a security deposit for
unfurnished and three months’ rent for furnished units.
24. b – Two months’ rent is the maximum security deposit allowable for unfurnished residential
rentals.
25. a – Rental income is taxable when received.
26. d – This is a NOT question. Answer choice D. preparing depreciation schedules for owners
is more appropriate for an accountant and does not fall under the employment duties of a
property manager.
27. b – Real estate brokerage is considered a profession. Therefore, real estate law is found in the
Business and Professions Code. Not all brokerage offices are corporations, eliminating
answer selection A. the Corporations Code. Further, answer selection C. the Statue of
Limitations is a state law specifying which contracts are to be written and signed before they
will be enforced by a court.
28. b – The receipt for delivery of a subdivider’s final public report needs to be kept by the developer
for three years. This is the same record retention requirement that applies to all contracts and
documents related to a real estate transaction held by a broker.
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29. b – A voidable contract is valid until it is rescinded. One principal has the option of completing
the transaction or rescinding the contract due to a defect caused by the other principal.
30. b – Coercion or duress are one example of how a principal is given the option of rescinding
the contract. Elements of either condition will make the contract voidable at the discretion of
the aggrieved party.
31. d – When an offer is made and the seller accepts the offer, the effective date of the contract
will be when the acceptance has been communicated to the buyer.
32. c – All real estate sales contracts require the use of the legal description of the property (versus
just the street address). This is necessary to properly create documents, such as the deed, and to
issue a title insurance policy.
33. a – Based on the facts in the question, the best answer choice is that the buyer can demand the
return of their deposit when the seller fails to communicate their acceptance in the stated
time. Until the buyer has been informed of the seller’s acceptance, they may rescind their offer.
34. b – This is a NOT question. In a sale-leaseback transaction, the seller does not guarantee the
buyer’s performance on a loan. Answer choices A, C and D are all true of seller leaseback
transactions.
35. b – When a buyer purchases a property without the disclosure that it is on a septic system,
the buyer may rescind the contract. The alternative answer choices can be easily refuted.
The DRE has no authority over the seller and is thus not involved. One principal to an escrow
cannot unilaterally insist on something that has not been agreed to by both principals, such as
the demand that the property be connected to the sewer. Further, the utility company has no
capacity to address complaints on this nature.
36. c – A deed obtained through undue influence or threat is an example of a voidable deed. A
voidable deed is valid and enforceable after delivery until it is challenged due to a defect and
a court order declares it to be invalid. Void deeds are unenforceable at all times and never
convey an interest in real estate.
37. a – When a license renewal is submitted, the Department of Real Estate (DRE) is obliged to
review arrearages on child support payments. If it is found that the licensee is delinquent,
they are given 150 days to make up the past due payments before the full term of the license
will be granted.
38. d – Property managers who oversee maintenance or repair projects costing $500 or more
are subject to contractor licensing requirements issued by the California Department of
Consumer Affairs Contractors State Licensing Board (CSLB).
39. c – A loan broker is a licensed agent. They can service a private note so long as they have
written authority from the holder of the note to do so.
40. b – An opinion is a statement by an agent concerning an event or condition which has not
yet occurred based on readily available facts. When a statement is worded as an assurance the
events and conditions will occur, the statement reaches the level of a guarantee.
41. c – Any effort by a property manager to single out one demographic group is a violation of
fair housing laws.
42. d – When a member of a protected group has been discriminated against, they have
numerous remedies, including filing a civil action in state and federal courts, and filing a
complaint with HUD.
43. b – When a dispute arises in escrow, the escrow agent can file an interpleader action with
the courts asking for judicial resolution. The escrow officer is a neutral agent and cannot
make decisions for the parties. Further, they have no authority to cancel an escrow or arbitrate
on behalf of the principals.
274 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
44. a – Once the state has acquired property through escheat, there is no requirement to delay
disposing of the property.
45. a – Of the choices offered, only the Federal Housing Administration (FHA) will insure rental
property loans. CalVET and CalHFA properties require owner occupancy. The American
Land Title Association provides title insurance.
46. c – After all expenses of an income-producing property, including debt service and income tax
payments, have been paid, the resulting income from rental properties is called net spendable
income.
47. a – Dividing the net operating income (NOI) by the sales price yields the capitalization
rate (cap rate). The gross rent multiplier (GRM) uses the gross rent in the calculation.
48. c – This is an EXCEPT question. The capitalization rate (cap rate) is used in the income
approach, not the replacement cost method. The replacement cost method of appraisal is one
alternative of developing a value under the cost approach.
49. d – When an employing broker dies, all real estate activity needs to stop until a new broker
has been authorized to be responsible for the clients’ welfare.
50. d – Agency law is activated when a targeted transaction involves an agent working on behalf
of a principal. Therefore, answer selection A does not apply as no agents are involved.
51. d – The Agency Law Disclosure is always to be delivered as soon as practicable.
52. b – A salesperson owes a general non-fiduciary duty to third parties in a transaction. Each
of the alternative answer selections is inappropriate and nonexistent.
53. a – Confirmation of agency, as with disclosure of the agency law, is to be delivered as soon
as practicable.
54. d – All of the answer selections except D are possible forms of agency in California — single
agent, dual agent and implicit agent.
55. d – None of these conditions are required to create an agency relationship. An ostensible or
implicit agency has none of these conditions.
56. b – This is a NOT question. A homestead declaration protects a portion of the owner’s equity
in the property from seizure from creditors. An encumbrance is something that reduces the
property owner’s rights or equity.
57. a – This is a NOT question. All liens have a specific dollar value. Of the answer choices, only
A. conditions, covenants, and restrictions (CC&Rs) has no dollar value.
58. a – Easements generally run with the land and are real property. The only exception is an
easement in gross, which is usually held by an individual, typically a public utility company.
Encroachment is a form of trespass.
59. b – This is a NOT question. Answer selection B is not true since an easement in gross is not for
the benefit of an adjacent property owner, but frequently for a utility company.
60. c – Joists are horizontal wooden beams which support floors and ceilings. Headers are above
windows and doors. Studs are vertical elements. Rafters are diagonal beams reaching to
the roof beam. This question provides a good opportunity to become familiar with framing
terminology.
61. a – When no termination date or length of time is stated, an easement exists in perpetuity.
62. c – Imputed notice requires the full and complete disclosure of who is representing whom in
a transaction. Agency is not federal law and therefore both answer choice A cannot be right.
Answer selection B is wrong because private trade associations have no such authority over
agency law. Answer selection D is an unrelated concept.
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63. c – The name of the agency relationship between the broker and the client is called fiduciary.
64. b – When the Agency Law Disclosure is not provided in a targeted transaction, the client may
refuse to pay the commission earned by the broker. There is no criminal or license penalties
when an agent fails to properly provide the Agency Law Disclosure and confirmation. It also
does not automatically result the forfeiture of the broker’s license.
65. d – The replacement cost of a property can most easily be determined under the comparative
method, which uses a private costing service that provides generic pricing for property
types based on quality and regional differences. Answer selections C. unit-in-place and A.
quantity survey are more detailed and precise, while the index method is used for historic
appraisals.
66. c – Surplus utility is an example of functional obsolescence. Functional obsolescence
is created by items on the property that are either outdated or over-improved. Economic
obsolescence refers to conditions off the property. The other alternative choices are principles
of value.
67. d – The first thing an appraiser does when appraising vacant land is determine the highest
and best use of the subject property. This determination is needed before the appraiser can
determine what properties are comparable.
68. b – Economic life is the length of time a property produces an income attributable to the
building. Physical life refers to how long the physical building is anticipated to exist. The
actual age is the chronological age of the building based on when it was build. The effective
age is the age of the property based on its physical condition.
69. a – This is a NOT question. There is no need for a signature from the borrower (trustor) when
the loan is paid in full.
70. d – The Federal Housing Administration (FHA) insures loans and does not originate
them. The loan is made by a lender and FHA provides insurance to the lender in the event of
borrower default. As with other loans, the interest rate is negotiated between the lender and
the borrower.
71. c – This is a NOT question. Individuals cannot acquire property by escheat, which is possible
only by the state government.
72. b – Escrow officers can draft escrow instructions and the grant deed. They are neutral
agents for the principals to the escrow. Thus, they are not permitted to make decisions for the
principals nor mediate between them.
73. b – When an escrow office is given instructions written and signed by both principals, the
escrow officer does not need approval from the broker. Escrow officers cannot make decisions
themselves nor resolve issues between the principals.
74. d – This is a NOT question. Material facts that may affect the buyer’s decision to buy need
to be disclosed. Thus, the licensee’s concealment of a roof leak is not legally proper. Answer
choice A. Puffing is not illegal unless it reaches the level of fact in the mind of the buyer.
Answer selection B is acceptable because it was at the seller’s request. Answer selection C is
permissible as long as the defect is disclosed on the Transfer Disclosure Statement (TDS).
75. b – An agent may negotiate the sale of a mobile home once it has been registered. New
mobile homes can only be sold by licensed agents when they are attached to the land, making
them real estate versus personal property.
76. b – Since the walls are 6” thick, the outside measurement is 61’ x 91’ = 5,551 sq. ft.
77. c – The Transfer Disclosure Statement (TDS) became effective January 1, 1987. The TDS is
a mandatory disclosure prepared by a seller and given to prospective buyers setting forth any
property defects known or suspected to exist by the seller.
276 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
78. d – The Statute of Frauds mandates certain contracts be in writing when the time element
exceeds one year or when involved in the sale of real estate
79. c – The Statute of Limitations allows a buyer four years to bring suit for a breach of written
contract against a seller.
80. c – The Statute of Limitations allows a buyer four years to bring suit against the seller for
failure to perform and close escrow.
81. a – When making an offer on a home, since only Sally is available to sign the offer, it is
made in her name rather than both Sally and Marc Taylor. However, if the offer is accepted,
Mark can be added to the title during escrow. Ordinarily, property purchased during marriage
is treated as community property.
82. b – The owner of an apartment building is ultimately responsible for inspections and
maintenance of the building, even if they employ a property manager and resident manager.
83. d – An existing lease must be honored when a building is purchased by a new owner.
84. b – Electronic records of a broker’s transactions are legal provided the broker can deliver
hard copies to DRE upon request.
85. d – The method used to vest title to a property has legal and tax consequences. The act of
deciding for the buyer may be construed as being discriminatory as well.
86. c – Lending 100% of the value of a property without government guarantees requires property
appreciation to overcome the risk of loan default. Thus, this type of no down payment loan
is highly uncommon.
87. d – Condominium is a form of ownership, not a building style or purpose. It has no relation
to when a property was built. A condominium is an estate in real property in which an owner
holds an undivided interest in common in a portion of real property, coupled with a separate
interest in their individual space. One can create condominiums in industrial and commercial
buildings, as well as residential properties.
88. d – This is a NOT question. Payment of taxes and assessments are required only in the
instance of adverse possession, but are not required for obtaining an easement by prescription.
Confronting the owner is never required of either adverse possession or an easement by
prescription. Open and notorious use of the easement for five years is all that is required to
establish a prescriptive easement.
89. d – An easement is terminated on the release of the dominant tenement (the party that
benefits from the easement).
90. c – The answer selection that is most similar to acquisition of an easement by prescription
is adverse possession as both involve the adverse use of a property. None of the other answer
selections relate to this premise.
91. c – Under the Uniform Electronic Transactions Act, a real estate broker who obtains
documents involved in a transaction that contain an electronic signature is required to retain
a copy of these documents in the form of a paper copy, electronic duplicate, and by retaining
copies at a location other than the broker’s place of business.
92. a – Among the choices, only mutual consent will terminate an agency relationship. Death
of a third party will have no relation to an existing agency relationship. Further, estoppel is a
legal theory barring a person from later asserting or denying a condition based on the person’s
previous acts or statements, and thus has little relevance to the question. A dispute does not
terminate an agency relationship.
93. b – Real estate commissions are based on a percentage of the sales price mutually agreed to
by the participants.
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anything that is clearly observable by inspecting the property, including the existence of a
physical feature such as telephone poles (as may be used to indicate the general location of
property lines, for example) or a stranger in possession.
111. b – Recording a deed provides constructive notice of the ownership of a property. Constructive
notice is also that which is observable by visual inspection. Answer selection A. actual notice
has a similar premise but requires personal delivery, which is not stated in the question and
thus is not the best answer. The other answer selections do not exist.
112. a – A listing broker is the agent of the seller.
113. c – Appurtenant rights include the ability to access property. The legal terminology for this is
ingress and egress (enter and exit).
114. c – This is a NOT question. A written agreement is not necessary to create an agency
relationship.
115. b – This is a NOT question. An agency relationship cannot be created without the consent
of the principal. It may be created by ratification after the fact, be implied by the actions of the
agent or be created out of necessity in the event of an emergency.
116. d – This is a NOT question. Obsolescence is a loss in value due to reduced desirability and
usefulness of a structure because its design and construction become obsolete. Obsolescence is
unrelated to the maintenance of a property. Physical wear and tear and the need for paint are
not examples of obsolescence.
117. b – The income approach of appraisal is inappropriate when appraising residences in an
owner-occupied subdivision as they do not generate revenue. The income approach is
appropriate for an income-generating rental property whose value is based on the income it
produces.
118. c – When member banks are charged a higher interest rate by the Federal Reserve (Fed), they
charge a higher interest rate to their customers. This in turn reduces the amount of money in
circulation.
119. a – This is a NOT question. Advance rents are not required when entering into a lease. The
alternative answer selections are all necessary.
120. c – A leasing agent generally receives a percentage of the total lease payment over the
term of the lease as their fee.
121. d – The maximum amount recoverable from the Real Estate Recovery Fund is $250,000.
122. a – Submission of a counteroffer voids the original offer. The roles of the offeree and offeror
are reversed when a counteroffer is written.
123. b – The Department of Fair Employment and Housing is the California state agency
primarily responsible for enforcement of anti-discrimination law. The United States
Department of Housing and Urban Development (HUD) is the federal agency.
124. b – This is a LEAST likely question. Answer selection B. may seem like a tempting red-herring.
Interest on an assumed loan will be a credit on a buyer’s closing statement. The transaction
didn’t require new financing, but rather the assumption of an existing loan. Loan interest
is paid in arrears. Thus, when escrow closes, the buyer will be credited for however many days
there were between the due date of the previous payment and the close of escrow. All other
answer selections will likely appear as a debit on the buyer’s closing statement.
125. a – Carbon dioxide is what we exhale. Carbon monoxide, formaldehyde and radon are all
potentially dangerous gasses.
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126. d – When filing a lawsuit against a credit reporting agency for the failure to correct a reported
error in a credit report, the injured party may request attorney fees and court costs, as well as
actual and punitive damages.
127. b – The Federal National Mortgage Association (Fannie Mae) is a government-sponsored
entity that buys, owns and sells mortgages in the secondary mortgage market.
128. a – Real estate licensees are granted a two-year grace period during which their license is
suspended and they cannot conduct real estate-related activities. If they choose to renew their
license during this time, they will need to complete the state-mandated continuing education
and pay a higher late renewal fee.
129. d – All these options are correct. The purchaser under the U.S. Department of Veterans
Affairs (VA) loan program has the option to cancel for a variety of reasons including a low
appraisal. The buyer may also choose to purchase the property by paying the difference
between the appraised value and the sales price as a cash down payment.
130. a – The agency disclosure law requires the agent to first disclose the existence of the law at
the earliest possible moment to the prospective client. Then, the agent needs to elect who they
will represent and confirm that election.
131. a – This is a NOT question. To represent both principals in a dual agency capacity, the agent
needs to obtain the consent of all principals at the earliest possible moment.
132. a – This is a FALSE question. Easements do not need to be recorded to be enforceable.
133. b – Appraisers always adjust the comparable, not the subject property. When a comparable
has an extra amenity (such as the 1/2 bath in the question), it needs to be removed by adjusting
an estimate of its worth in the market.
134. a – This is an EXCEPT question. The Federal Reserve (Fed) does not raise interest rates on
government-insured mortgages as part of its monetary policy. Government-insured
mortgages are originated by lenders. The interest rate charged on these loans is established
in the marketplace between the lender and the borrower. The alternative choices are all
appropriate monetary tools for the Fed.
135. d – The benefits of a Federal Housing Administration (FHA)-insured loan includes
a lower down payment requirement, lower monthly payments, and minimum building
standards.
136. a – Escrow officers act as dual agents during the escrow process and become a single agent to
both after the close of escrow. While the escrow office owes an agency duty to both participants
in the transaction, they are neutral and thus cannot act as an advocate or advisor for either.
137. c – A landlord may not single out the need of a co-signer for a specific group of prospective
tenants. So long as the requirements are consistently applied to all prospective tenants,
the landlord may require a high credit score, payment of the last month’s rent and positive
references.
138. d – Panic selling is the prohibited discriminatory practice of a real estate licensee inducing a
property owner to list a property for sale by suggesting a change in neighborhood demographics
will cause a loss in property values. Panic selling is a quintessential fair housing violation and
is grounds for disciplinary action.
139. d – Appraising residential properties valued over $1 million requires a certified license. The
license can be either a certified residential license or a certified general license.
140. a – The dual agent is a broker who concurrently represents both principals in a single
transaction, such as the buyer and seller, lessee and lessor, or borrower and lender.
280 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
141. d – The gross rent multiplier (GRM) is used to quickly calculate the value of a property. To
determine the value of a property under the income approach, the gross rent is multiplied by
the GRM. Thus, to find the GRM, the sales price is divided by the rent (either the monthly or
annual rent may be used).
142. b – The maximum potential income an income-producing property can generate is referred to
as the gross scheduled income. Gross is always greater than net and the question is asking
for the “maximum potential income.” Therefore, the answer choices can be narrowed down to
A and B. However, answer selection A. gross operating income refers to the income after the
vacancy and credit losses have been deducted.
143. c – Corrective maintenance is done when equipment in an income-producing property is
broken. Alternatively, answer selection A. deferred maintenance is the habit of postponing
the implementation of maintenance. Answer selection B. preventive maintenance is
maintenance performed in advance of equipment breaking down.
144. b – Casement windows have a crank that swings the window out on its hinges. Double-
hung windows have an upper and lower pane, which can be raised and lowered to open. Bay
windows have multiple panes of glass and project out from the wall. Dormer windows have a
separate roof and are commonly seen as projecting from a gable or gambrel roof.
145. a – An easement is terminated when the parcels are combined under one ownership.
146. d – The Agency Law Disclosure is required on the sale of any type of real estate. It is also
required on any lease that exceeds one year.
147. d – A broker cannot disclose a client’s personal financial information or acceptable price and
terms other than what the listing states. In this question, the broker violated their fiduciary
duty owed to the seller by exceeding their authority.
148. c – The Closing Disclosure replaces both the Truth-in-Lending Disclosure and the HUD-1
Settlement Statement under the TILA-RESPA Integrated Disclosure (TRID) rules. The
Closing Disclosure summarizes the final mortgage terms and details for the buyer and is to be
delivered to the buyer at least three business days before the buyer closes on the mortgage.
149. d – The source of most of California’s real estate law is English common law. After California
was acquired by the United States in 1848, all real property rights held under Spanish Civil
Law were resolved through federal courts, which eventually granted federal patents for land
ownership. Today, the most obvious vestige of Spanish Civil Law is the concept of community
property.
150. a – This is an EXCEPT question. When the buyer attempts to revoke the offer after the seller
accepts it — with the presumption acceptance was already communicated to the buyer — this
will NOT terminate the offer. The alternative answer selections will all terminate an offer.
Simulated Exam #5 281
SIMULATED EXAM #5
1. The holder of a life estate designated as the named life cannot:
a. lease the property. c. will their rights to an heir.
b. sell their interest in the property. d. borrow against their ownership interest.
2. A fee simple absolute estate is defined as:
a. an estate based on a condition precedent.
b. an estate for years.
c. the highest interest one can have in real property.
d. a life estate.
3. Land created by a river or lake that recedes permanently belongs to the owner of the bank or
shore through the process of:
a. alluvium. c. appropriation.
b. reliction. d. escheat.
4. Property improvements that do not become part of the underlying real estate at the end of a
lease term include:
a. a stairwell. c. attached carpeting.
b. a wall. d. large pieces of furniture.
5. In the order in which they are to occur, the three steps of agency disclosure are:
a. elect, confirm, disclose. c. disclose, elect, confirm.
b. disclose, confirm, disclose. d. confirm, elect, disclose.
6. When a broker represents the best interests of opposing parties in a transaction with full
disclosure to both parties, the broker is known as a(n):
a. unethical agent. c. dual agent.
b. subagent. d. finder.
7. Agency Law prohibits which of the following brokerage activities?
a. Accepting commissions from both the buyer and the seller.
b. Acting as an escrow.
c. Selling property they own.
d. Accepting kickbacks from the lender.
8. must remain the undisclosed knowledge of the dual agent, unless authorized
to release the information in a writing signed by the principal in question.
a. Confidential pricing information
b. Material facts regarding the property’s condition
c. The square foot measurements of the property
d. The proximity of military ordinance
9. An individual who has been delegated agency duties by an agent of the client, but is not
employed by the client, is referred to as a(n):
a. multiple listing partner. c. subcontractor.
b. subagent. d. tandem agent.
10. A(n) may be made to an offer received consisting of terms different from
those of the offer rejected.
a. waiver c. ratification
b. counteroffer d. novation
282 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
11. When a purchase agreement requires the seller to pay for a structural pest control inspection
and perform any necessary corrective work, the buyer needs to receive a copy of the structural
pest control report:
a. within five days of opening escrow.
b. within five working days of the date of the pest report.
c. as soon as practicable before the close of escrow.
d. no more than three business days after the close of escrow.
12. Which of the following is the most correct statement about an option to purchase contained in
a lease agreement?
a. The option to purchase will generally pass with an assignment of the lease.
b. The lease creates restrictions upon the optionee.
c. An option needs to provide mutual benefits and obligations.
d. An option creates a fiduciary relationship between the optionor and the optionee.
13. A broker enters into an oral listing agreement with a seller and locates a suitable buyer who
purchases the property. Payment of a commission to the broker is:
a. a violation of the Real Estate Commissioner’s regulations.
b. regarded as a violation of the Statute of Frauds.
c. a civil violation of the law.
d. unenforceable and at the option of the seller.
14. When one party is substituted for another party in a contract, it is called:
a. novation. c. subordination.
b. assignment. d. redaction
15. All records of an agent’s activities during the listing period need to be retained for:
a. four years. c. two years.
b. three years. d. one year.
16. If a principal no longer wants to employ a broker to act on their behalf after entering into an
exclusive right to sell listing, they may:
a. switch the listing to a different broker without the consent of the original broker.
b. revoke the listing contract and not be liable for damages.
c. choose not to cooperate in the marketing effort and risk liability for damages.
d. sue the broker for damages if the home didn’t sell.
17. As the first step in developing a risk reduction program for their office, a broker:
a. identifies all the activities agents perform which could result in a claim of liability
against the broker.
b. monitors ongoing agent compliance with established risk management protocol.
c. requires all their agents to take a driving test through an obstacle course.
d. requires licensees to provide proof of health insurance.
18. If a water heater meets safety requirements, the seller notes the compliance by marking the
box next to “anchored, braced or strapped” on the:
a. purchase agreement. c. Transfer Disclosure Statement (TDS).
b. Environmental Impact Report (EIR). d. Paolo Safety Disclosure.
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19. A broker has a listing on a property and locates a buyer who is willing to purchase the property
for greater than the listing price. The broker does not disclose the existence of the offer to the
seller and purchases the property themselves, later selling it to the original buyer. Here, the
broker is guilty of:
a. breaching their fiduciary duty to the seller.
b. extracting an improper secret profit.
c. improperly converting the profits from the sale.
d. Both a. and b.
20. are allowed between two brokers if the broker receiving it is not providing
another service in the transaction, such as financing, insurance or escrow.
a. Referral fees c. Secret profits
b. Hidden fees d. Duplicate fees
21. Broker fees deposited with a broker by a client prior to being earned by the broker are known
as:
a. duplicate charges. c. advance fees.
b. advance costs. d. kickbacks.
22. The Natural Hazard Disclosure Statement (NHD) requires the seller’s agent to disclose to a
prospective buyer whether they have knowledge the property:
a. has a roof more than three years old.
b. is located in a fault zone.
c. is located in an area with a high crime rate.
d. has an outdoor pool.
23. The federal Lead-Based Paint Disclosure (LBP) is required on all residential
construction.
a. pre-1978 c. pre-1995
b. post-1978 d. post-1995
24. Commingling is the opposite of:
a. subrogation. c. subordination.
b. mixing d. separation.
25. A broker maintains a for each owner of trust funds held in a trust account.
a. subaccount ledger c. marketing package
b. carbon record d. deposit receipt
26. An unlicensed assistant can properly:
a. show property to prospective buyers.
b. enter into a listing agreement on behalf of their employing broker.
c. discuss the terms and conditions of a possible sale.
d. prepare a Competitive Market Analysis (CMA) for a prospect.
27. A broker may use funds in a company trust account to:
a. make mortgage payments on behalf of the owners of properties managed by the broker.
b. to pay office salaries.
c. provide advances to salespeople.
d. pay for personal items, so long as the trust account is reimbursed.
284 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
28. A brother and sister held title to a duplex as joint tenants. All their other business and personal
properties were held separately. The sister, who was insolvent, died with outstanding debts
owed to creditors. After her death, title to the duplex is held by the brother:
a. free and clear.
b. as a tenant in common with the sister’s creditors.
c. as a tenant in common with the tenants of the duplex.
d. subject to probate procedures.
29. Although title to an income-producing property held by co-owners for profit is vested in the
names of all the co-owners, it is collectively called a(n):
a. trust c. partnership
b. sole ownership d. fiduciary
30. An abstract of title issued by a title insurance company is:
a. a boilerplate industry form.
b. functions as a preliminary title report.
c. defines the physical borders of the property.
d. a written summary of documents shown in the title history of the property.
31. Which type of title insurance policy insures against all title risks?
a. American Land Title Association (ALTA).
b. Extended coverage policy.
c. California Land Title Association (CLTA).
d. No title policy covers all risks.
32. When a loan is secured collaterally, the loan is a(n):
a. chattel mortgage. c. all-inclusive loan.
b. loan secured by another loan. d. piggyback loan.
33. The promissory note and mortgage are signed by:
a. the mortgagee. c. the trustee.
b. the lender. d. the mortgagor.
34. The Real Estate Settlement Procedures Act (RESPA) prohibited __________ in 1974.
a. kickbacks c. adjustable rate mortgages (ARMs)
b. subprime loans d. piggyback loans
35. Which of the following is most important to a lender when determining whether to fund a
loan?
a. The amount of liquid funds it has on reserve to originate other loans.
b. Its relative risk of funding the loan.
c. Its profit margin on the loan.
d. The appraised value of the property securing the loan.
36. Changes in mortgage financing terms will affect the:
a. price and value of the property. c. value only.
b. price only. d. use of the property.
37. When deciding whether to fund a real estate loan, institutional lenders generally avoid:
a. a high risk yield. c. borrowers with multiple jobs.
b. high income borrowers. d. subprime loans within their portfolio.
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38. The ethics and standards of practice for appraisers are described in:
a. State Real Estate Law.
b. Member of the Appraisal Institute (MAI) Reference Manual.
c. Uniform Standards of Professional Appraisal Practice (USPAP).
d. Fannie Mae (FNMA) Guidelines.
39. In real property, the major loss of value comes from:
a. deterioration. c. old age.
b. obsolescence. d. lack of maintenance.
40. While building a new home, a developer received several offers to purchase the property. Prior
to completion, the city announced it was taking 15 feet from the front of the property for a new
bicycle lane. Afterwards, all additional offers to purchase the property were for 20% less. Which
of the following types of depreciation apply?
a. Physical wear and tear. c. Social dissatisfaction.
b. Functional obsolescence. d. Economic obsolescence.
41. The basis of the market data approach to appraisal is found in the:
a. principle of balance. c. principle of conformity.
b. principle of substitution. d. principle of contribution.
42. When two properties are perceived as comparable, buyers tend to concentrate on price. This
principle is called:
a. contribution. c. balance.
b. anticipation. d. substitution.
43. Under the market comparison approach, if a comparable property lacks a feature that is present
in the subject property, the value that feature will contribute is:
a. ignored since it has no effect on the sales price.
b. identified in the appraisal report for comparison purposes.
c. added to the sales price of the comparable property.
d. subtracted from the sales price of the subject property.
44. The appraisal method most commonly used to value land or sites is the:
a. cost approach. c. the land development approach.
b. income approach. d. sales comparison approach.
45. All of the following describe excess land, except:
a. Land which does not add to the total value of the property.
b. Land in excess of that used by comparable properties.
c. Land that is not sufficiently utilized by the improvements on it.
d. Land that is used to store unused property fixtures.
46. For a retailer, the most important factor when choosing the site for a commercial property is:
a. visibility. c. traffic flow.
b. easy access. d. the purchasing power of the area.
47. A broker acting as an agent on behalf of both the landlord and tenant is a(n):
a. single agent. c. double agent.
b. dual agent. d. subagent.
286 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
48. A broker on any type of real estate transaction who fails to promptly disclose their dual agency
is subject to:
a. liability for their clients’ money losses.
b. a $25,000 penalty.
c. disciplinary action by the Internal Revenue Service (IRS).
d. deportation.
49. After a broker enters into a listing agreement for an apartment building with a corporation, the
officers of the corporation die in an accident. What happens to the listing?
a. The listing is withdrawn from the market until new corporate officers ratify the
agreement.
b. The listing is automatically voided as the employing party has died.
c. The listing is unaffected and enforceable.
d. The listing converts to a debt obligation against the corporation in the amount of the
broker’s commission.
50. The Real Estate Commissioner, under the Subdivided Lands Law, deals primarily with the
court.
a. Municipal c. Federal Supreme
b. Superior d. State Appeals
51. In a general plan, what is the method of enforcement used by the planning commission?
a. Escheat. c. Eminent domain.
b. Prescriptive easement. d. Zoning.
52. Riparian rights:
a. grant ownership of adjacent water ways to a neighboring real estate owner.
b. include the right to reasonably appropriate water from a river, stream or brook as
needed.
c. need to be expressed in the mortgage or note and trust deed.
d. may be discovered through a thorough examination of public records.
53. When population growth causes real estate values to increase, this is classified as:
a. substitution. c. excess profit.
b. economic advantage. d. an unearned incremental increase.
54. Which of the following is an example of a subdivision?
a. Six row houses.
b. A triplex converted to condos.
c. A condo converted to six timeshare properties.
d. Eight timeshare properties.
55. A soil pipe is a(n):
a. drainage pipe. c. electrical conduit.
b. sewer pipe. d. any clay or adobe pipe.
56. When one broker authorizes another broker to act as a subagent on the seller’s approval, the
subagent is primarily responsible to:
a. the Department of Real Estate c. the original broker.
(DRE).
b. the seller. d. both the buyer and the seller.
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65. A listing broker needs to present all offers received on a listing property until:
a. an offer is accepted. c. all contingencies are removed.
b. escrow is opened. d. escrow is closed.
66. All of the following a seller of a property is not bound by the acts and representations of, except:
a. the escrow officer performing escrow for the transaction.
b. the listing broker employed by the seller.
c. the mortgage broker who funds the buyer’s loan.
d. the buyer’s broker.
67. When asked by the prospective buyer about any aspect of a property, the seller’s agent:
a. is duty-bound to respond fully and fairly to the inquiry.
b. only needs to respond if the question addresses a material fact about the property.
c. is to refer the buyer to address the question to the buyer’s agent.
d. is duty-bound to answer only as authorized by the seller.
68. A preprinted disclaimer contained in the statutory Transfer Disclosure Statement (TDS) states
the disclosures made by the seller on the form:
a. may be relied on by a buyer as a warranty of the actual condition of the property.
b. are not part of the terms of the purchase agreement.
c. Both a. and b.
d. Neither a. nor b.
69. A property manager must deposit all funds collected on behalf of a landlord into a
within three business days of receipt.
a. trust account c. general brokerage account
b. personal account d. savings account
70. Which of the following appraisal reports provide the greatest degree of detail about a property?
a. Uniform Residential Appraisal Report. c. Fannie Mae Form 1004.
b. Appraisal letter. d. Narrative appraisal report.
71. The value of unimproved property is best estimated by which of the following appraisal
approaches?
a. The income approach. c. The cost approach.
b. The sales comparison approach. d. Capitalization rate (cap rate).
72. The unit of comparison when appraising land is:
a. cost per square foot. c. cost per acre.
b. cost per front foot. d. Any of the above.
73. When a dual agency relationship is established in a targeted sales transaction, the broker and
their agents may not pass on any information from one party to the other relating to:
a. the price the buyer may be willing to pay.
b. the terms of payment the seller may be willing to accept.
c. confidential financial information of the parties.
d. All of the above.
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74. The price a reasonable, unpressured buyer would pay for a property on the open market as set
by an appraisal is known as the:
a. mark-to-management value. c. value in use.
b. fair market value (FMV). d. assessed value.
75. The referral of a client to a financially controlled business owned by the broker is required to
be disclosed by use of a(n):
a. Agency Law Disclosure.
b. Affiliated Business Arrangement Disclosure Statement.
c. home inspection report.
d. Conflict of Interest Disclosure.
76. The , contained in all purchase agreements, states the existence or
nonexistence of each broker’s fiduciary agency with the various parties to the transaction.
a. agency confirmation provision c. hold harmless agreement
b. broker liability agreement d. attorney fee provision
77. A listing broker enters into negotiations to sell an office building to a limited partnership in
which the broker is a limited partner. The broker does not disclose their interest in the limited
partnership to the seller. Before closing, the seller discovers the broker’s interest and refuses to
sell. What is the likely outcome of a civil suit to collect a commission?
a. The case is transferred to the Real Estate Commissioner.
b. The case is sent to criminal court.
c. No commission would be due to the broker.
d. The broker would likely be awarded their full commission.
78. Accretion results in the acquisition of title to real estate by which of the following methods?
a. Eminent domain.
b. Acquisition through natural causes.
c. Transfer through a valid will or intestate succession.
d. Acquisition of title by adverse possession.
79. An unearned incremental increase in the value of real property does not result from:
a. added amenities to the property.
b. change of zoning.
c. increased density of population.
d. advantageous methods for measuring depreciation.
80. A person who owns an undivided interest in a parcel of real property together with a separate
interest in communal space has an interest in a(n):
a. subdivision. c. commune.
b. condominium project. d. corporation.
81. A property owner dies testate, leaving a spouse and three children. The owner’s estate is
distributed:
a. to their heirs by right of reversion.
b. one-half to their spouse and one-half divided among the three children.
c. equally among the heirs.
d. in accordance with their will.
290 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
82. The right to use, enjoy and alienate real estate to the exclusion of all others most accurately
describes:
a. a possessory right. c. ownership.
b. a tenancy. d. an estate for years.
83. Which of the following may also be called an estate of inheritance?
a. Fee simple. c. Condition subsequent.
b. Remainder interest. d. Future life estate.
84. A residential neighborhood suffers economic obsolescence from which of the following?
a. Functional inadequacies.
b. Airplanes landing at a nearby local airport.
c. Physical wear and tear.
d. Obsolete heating and cooling systems.
85. All of the following are NOT examples of economic obsolescence, except:
a. A leaking roof. c. An oversupply of like-kind properties.
b. No off-street parking. d. A deteriorated bearing wall.
86. If multiple lenders participate in the same loan but in different portions, the loan is a(n):
a. 80/20 mortgage. c. participation loan.
b. piggyback loan. d. apportioned loan.
87. When a broker’s unlicensed assistant prepares marketing material, the Business and Professions
Code requires:
a. the broker to be the original source of all content for the advertisements.
b. the broker to read and approve all material before it is used.
c. the broker’s approval to be in writing before the material is used.
d. the broker to ensure the assistant is provided with accurate information.
88. All of the following transactions are necessary for a broker to maintain trust records, except:
a. A check immediately handed to escrow.
b. A deposit check delivered to the seller.
c. A rent check quickly delivered to the lessor.
d. None of the above.
89. Which of the following is the most important reason for a broker to maintain a trust fund
account separate from the business account?
a. To impress clients.
b. To satisfy Department of Real Estate (DRE) auditors.
c. To avoid the commingling and converting the funds.
d. For ease of accounting.
90. A buyer wishing to recover losses caused by a listing agent’s negligent failure to disclose known
material defects has to pursue their losses.
a. one month c. one year
b. six months d. two years
91. Apartment buildings with or more units are required to have a landlord, resident
manager or responsible caretaker living on the premises to manage the property.
a. 8 c. 16
b. 12 d. 24
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92. A broker is assured a fee under a safety clause in a listing agreement if:
a. information about the property is provided to prospective buyers during the listing
period by the listing agent.
b. the seller is notified of the identification of the prospective buyers who later purchases
the property as soon as possible after termination of the listing.
c. a prospective buyer located during the term of the listing acquires the property as a
result of negotiations commenced during the safety period.
d. All of the above.
93. Which of the following is the maximum term of an exclusive right to sell listing on real
property?
a. One year. c. 90 days.
b. Six months. d. Whatever time period is agreed to by the
seller and broker.
94. Any exclusive right to sell listing needs to contain a(n):
a. definite termination date.
b. commission rate below the state maximum.
c. definite listing price.
d. authorization to accept a deposit from a buyer.
95. An irrevocable right to purchase property within a specific time period is called a(n):
a. option to buy. c. subrogation.
b. novation. d. right of first refusal.
96. All of the following terminate an offer to purchase real property, except:
a. A counteroffer.
b. When the offeror revokes the offer after the offeree notified them of their acceptance.
c. Death of the offeree prior to acceptance.
d. When the stated period given by the offeror is exceeded prior to acceptance by the
offeree.
97. Brokers and agents are required to complete ______ hours of continuing education (CE) every
four years to renew a license issued by the Department of Real Estate (DRE).
a. 50 c. 30
b. 45 d. 15
98. Commission splits between a broker and a salesperson are determined by:
a. an implied contract. c. local custom.
b. an express contract. d. a written contract.
99. The Transfer Disclosure Statement (TDS) requires a broker to:
a. visually inspect the property and inform the buyer of any material facts.
b. inspect the common areas in a condominium community.
c. inspect the inaccessible areas of the property.
d. pay for a mold and radon gas inspection.
100. A Transfer Disclosure Statement (TDS) needs to be delivered to buyers on targeted transaction
by the:
a. court assignee. c. beneficiary.
b. trustee. d. seller.
292 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
101. The holding of the Easton v. Strassburger court case requires brokers to:
a. explain economic conditions to the buyer.
b. notify the buyer of their right to property inspections.
c. explain the meaning of “as is” in regards to a property.
d. reveal all known material facts about a property.
102. Use of the Natural Hazard Disclosure (NHD) statement is required by sellers on:
a. court-ordered transfers or sales and transfers to or by governmental entities.
b. transfers between co-owners and transfers to relatives or spouses.
c. Both a. and b.
d. Neither a. nor b.
103. Senior citizen housing is restricted to housing for persons or older.
a. 52 or 55 c. 55 or 62
b. 55 or 60 d. 65 or 72
104. Broker Stella, who is not a Realtor, uses a sign which says “Realtor” at her home office. She
pays a 17 year-old high school student $10 for each listing they bring into her office. She keeps
her client’s money in her safe at home. All of the following are violations of the real estate
law, except:
a. Paying an unlicensed person to solicit listings.
b. Improper office location.
c. Using the term “Realtor” when she is not a member of the National Association of
Realtors (NAR).
d. Commingling the client’s money with her own money in the home safe.
105. When a broker deposits a client check into the company general account, the broker has
committed:
a. conversion. c. commingling.
b. reconciliation. d. puffing.
106. When a property is vested with “alienable title,” this means it:
a. cannot be conveyed. c. can be conveyed.
b. is encumbered. d. is restricted as to who the property can
be transferred to.
107. Title insurance is the means by which the title insurance company a person
who acquires an interest in real estate against a monetary loss caused by an encumbrance on
title.
a. holds harmless c. indemnifies
b. reimburses d. All of the above.
108. All of the following is included in any policy of title insurance, except:
a. Defects in the chain of title.
b. Lack of capacity of a previous title holder.
c. Legal fees and expenses incurred to defend title.
d. A zoning or regulation dispute.
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109. When the market turns from a seller’s market to a buyer’s market, which of the following is
true?
a. Interest rates go down. c. Prices fall.
b. Prices rise. d. There is no change in price.
110. The value of the nicest home on the block will be reduced by the existence of inferior properties
on the same block. This is known as the principle of:
a. regression. c. highest and best use.
b. progression. d. substitution.
111. All of the following are examples of functional obsolescence, except:
a. an over improvement. c. a one car garage.
b. a swimming pool in cold climate. d. deferred maintenance.
112. The Agency Law Disclosure is not required to be attached to a(n):
a. exchange arrangement.
b. purchase agreement for single family residential property.
c. purchase agreement for commercial property.
d. month-to-month rental agreement.
113. When showing a listed property to potential buyers, what is the listing broker required to
disclose?
a. Only what they have been authorized by the seller to disclose.
b. All facts about the seller’s motivation that might cause the buyer to make an offer.
c. Anything that encourages the buyer to buy quickly.
d. All known material facts about the property.
114. All of the following statements are true concerning an in-house sale, except:
a. the listing broker can buy the property themselves.
b. the listing broker can act as an agent for the seller only.
c. the listing broker can act as a dual agent.
d. the listing broker can act as an agent for the buyer only.
115. Which of the following zoning designations is suitable for land used as the site of multi-
family residential developments?
a. I-3. c. R-4.
b. R-1. d. MU-4.
116. Which of the following creates an agency relationship?
a. Subornation. c. Ratification.
b. Voluntary action of the broker. d. Interlineation.
117. A valid agency relationship does not require a(n):
a. written agreement. c. attorney-in-fact.
b. express agreement. d. Any of the above.
118. “Agency” includes relationships between licensed sales agents and their brokers as well as:
a. escrow officers and real estate licensees.
b. lenders and the agents who recommend them.
c. finders and the brokers who employ them.
d. real estate licensees and the Department of Real Estate (DRE).
294 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
137. With only a few days left before the close of escrow, the buyer asks the broker for permission
to move into the vacant house. The broker is to:
a. ask the buyer to deposit the balance of the down payment into escrow first.
b. give the buyer access and approval.
c. refuse to give the buyer access and approval.
d. seek approval from the seller.
138. The authority a broker has when acting as an agent for a principal is:
a. that which is granted by the Commissioner of the Department of Real Estate
(DRE).
b. whatever the broker chooses to take.
c. that which is conferred by the principal.
d. whatever the broker accepts as limited by the statute of frauds.
139. An agency relationship in real estate between a licensee and a principal is terminated in
several ways. All of the following terminates an agency relationship, except:
a. The death or incapacity of either the seller or broker.
b. Revocation at any time by the principal.
c. Destruction of the property.
d. None of the above.
140. A lot 300 feet deep lost 10 percent of its depth. What is the effect of the loss in depth on the
value of the lot?
a. A 10% decline in value.
b. A decrease of value in excess of 10% due to the change in utility.
c. The price per front foot will increase.
d. The price per square foot will increase.
141. When using the market comparison approach to appraise a single family residence (SFR),
property comparisons are based on:
a. the gross rent multiplier (GRM). c. the rental income the property generates.
b. price per cubic foot. d. the entire property.
142. When changes are made in a residence to correct functional obsolescence, this activity is
termed:
a. reproduction. c. remodeling.
b. replacement. d. repair.
143. What is the name of sheet metal that protects a building from water seepage?
a. Sill. c. Flashing.
b. Weep hole. d. Shingles.
144. Open roof sheathing is a component of a(n):
a. wood shake roof. c. composite shingle roof.
b. gravel and tar paper roof. d. fiberglass tile roof.
145. Property is defined as:
a. rights or interests which a person has in a thing owned.
b. real if it is a trade fixture.
c. personal if it is a fixture.
d. a license to use something owned by another for a temporary period of time.
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146. Under which type of title insurance policy is a title insurance company least likely to
physically inspect the property?
a. Standard policy. c. Extended coverage policy.
b. Abstract of title. d. Preliminary title report.
147. A residential duplex was purchased for $400,000. The buyer assumed an existing note and
trust deed against the property for $300,000. The documentary transfer tax for this county is
$.55 per $500 of consideration. The transfer tax is:
a. $110. c. $55.
b. $440. d. $220.
148. Two salespersons submit offers on the same property listed by a third salesperson within the
same office. Before any offer is presented, the salesperson who submitted the first offer argues
the seller should be given time to make a decision about their offer before being presented the
second offer. The listing agent is to:
a. agree to do so.
b. refuse to present the second offer at all if the seller likes the first.
c. present both offers in the order received, allowing the seller to make counter offers on
each.
d. present both offers at the same time.
149. Which of the following is least likely to be searched by a title company when performing a
title search?
a. The county clerk’s office. c. The secretary of state.
b. The county recorder. d. The federal registry.
150. The Real Estate Settlement Procedures Act (RESPA) applies to:
a. agricultural loans written by a bank.
b. a U.S. Department of Veterans Affairs (VA)-guaranteed loan.
c. a commercial loan for a twenty-unit apartment complex.
d. automobile loans written by a federally chartered bank.
298 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
15. b – All records of an agent’s activity need to be kept for a minimum of three years. This includes
listing contracts, disclosures, employment contracts, periodic reports of solicitation efforts, and
paper trails for properties sold.
16. c – When a property owner no longer wants to work with a broker after signing an exclusive
right to sell listing, they can either unilaterally revoke the listing or refuse to cooperate in the
marketing effort. However, in either case, they will risk being liable for money losses to the
broker.
17. a – The first step in a risk reduction program is to identify the activities that create potential
liability. Answer selection B is the only other answer that is close to correct, though it is not
the best answer available as it involves monitoring agent activities after the activities that
create potential liability have been identified. Thus, it is not the first step in developing a risk
reduction program.
18. c – The Transfer Disclosure Statement (TDS) is the appropriate disclosure form to reference
the compliant installation of a water heater
19. d – By not disclosing the existence of an offer to their client seller, the broker has violated their
fiduciary responsibility. Further, when the broker subsequently purchased the property
themselves and resold the property to the original buyer, they were guilty of receiving a secret
profit.
20. a – Referral fees between brokers are legitimate and acceptable provided the broker receiving
the fee is not also collecting other monies for services rendered in the same transaction. Hidden
fees, secret profits and duplicate fees are never proper.
21. c – Advance fees are monies received by a broker for services not yet rendered, and are
regulated by the Department of Real Estate (DRE). Alternatively, advance costs are deposits
handed to a broker to cover out-of-pocket costs incurred on behalf of the depositor while
performing brokerage services.
22. b – The Natural Hazard Disclosure Statement (NHD) is a disclosure of natural hazards,
such as a fault zone — not manmade, environmental hazards. All three alternative answer
selections are manmade.
23. a – Lead-based paint was outlawed in 1978. Thus, the need to disclose the existence of lead-
based paint is applicable to residences that were built before lead-based paint was outlawed.
24. d – Commingling is the mixing of client funds with those of other clients, the brokerage firm
or the individual agent. Therefore, separation is the opposite.
25. a – A broker maintains a subaccount ledger for each client whose monies are held in a trust
account. None of the other answer selections apply to a trust account.
26. d – An unlicensed assistant may create a Competitive Market Analysis (CMA) for a
prospective client. An unlicensed assistant cannot do anything that requires a license, such as
show property to prospective buyers, enter into a listing agreement on behalf of their employing
broker or discuss the terms and conditions of a possible sale. An unlicensed assistant’s work is
clerical in nature.
27. a – Trust fund monies are held for the benefit of the client and may only be used exclusively
for the client. Therefore, making mortgage payments on behalf of the owners of properties
managed by the broker is acceptable.
28. a – Joint tenancy properties are transferred to the surviving tenant free and clear of any debt
owed by the deceased joint tenant.
29. c – An investment property owned by several people is described as a partnership.
300 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
30. d – An abstract of title is a summary or digest of all transfers, conveyances, legal proceedings,
and any other facts relied on as evidence of title, showing continuity of ownership and any
elements of record which may impair title. It does not define the borders of a property or replicate
the function of a preliminary title report. Further, as the abstract provides a written summary
of documents related to the history of a specific property, it is not a generic, boilerplate form.
31. d – No title insurance policy can insure against all risk. Exceptions are included in all
policies of title insurance.
32. b – A collateralized loan is one secured by another loan, rather than a property.
33. d – Real estate mortgages are secured by property. Thus, the property owner (mortgagor)
signs the promissory note and mortgage.
34. a – The Real Estate Settlement Procedures Act (RESPA) outlawed kickbacks in 1974.
35. b – The most important consideration of a lender when determining whether to originate a
loan is the level of risk it is exposed to. While the other answer selections are valid concerns,
lenders are primarily motivated by the avoidance of risk. For instance, a high profit margin
would be of lesser importance if the risky loan promptly goes into default.
36. b – Changes in mortgage financing terms affect real estate prices. Value is a matter of worth
and perception, and is therefore not affected by financing costs. The use of a property is also
unaffected.
37. d – Lenders generally avoid holding a large volume of subprime loans in their portfolio as
these types of loans are more likely to result in borrower default. High risk yield is the lender’s
method of balancing risk by demanding a greater return when a higher risk is identified.
38. c – The Uniform Standards of Professional Appraisal Practice is the code of ethics for
appraisers.
39. b – Obsolescence is the greatest loss in value for real estate as it affects the utility of the
structure, and thus its value and marketability. Deterioration and lack of maintenance are less
damaging and may be remedied. The age of a property has little to do with its value, provided
it is properly maintained.
40. d – Governmental actions, such as a partial taking, are an example of economic obsolescence.
41. b – The principle of substitution is the basis of all appraisal including the market data
approach. The principle of substitution holds that a buyer will pay no more for a property than
the cost of a similar property. Similarly, a seller will accept no less than a similar property sold
for.
42. d – The principle of substitution states that the value of a property is equal in amount to
the amount that would be paid to buy an equivalent property available in the open market.
Alternatively, the principle of contribution holds that an improvement to a property is only
worth what it adds to the value, not what it costs. The principle of anticipation holds that a
perceived change in the future will have an effect on the present worth of the property. The
principle of balance refers to the ratio of land and improvement value that will maximize the
overall value of the property.
43. c – An appraiser adjusts the value of the comparable property, not the subject property. The
value is adjusted in the direction of the subject. Since the subject property has an added feature,
the value of the feature in the marketplace will be added to the comparable property to
make the two more similar.
44. d – The sales comparison approach is the most commonly used appraisal method to value
raw land since it has neither an improvement cost nor an income generated.
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45. d – All of the answer selections correctly describe the condition of excess land except answer
selection D, as the land is being used for a practical purpose, i.e., storage.
46. d – Purchasing power is the most critical issue when choosing a site for a commercial
retailer. When the neighborhood the business is located in has discretionary income, there is a
greater possibility of profit for the business. Hence, purchasing power is inextricably linked to
an advantageous location.
47. b – Whenever an agent concurrently acts on behalf of both participants, they are acting as a
dual agent.
48. a – The broker will be liable for any client financial losses when they fail to disclose their dual
agency status.
49. c – When a broker enters into a listing agreement for a property owned by a corporation, the
listing contract is unaffected by the death of the corporate officers. Here, the broker is employed
by the corporation, not the individual corporate officers.
50. b – Any legal action initiated by the Real Estate Commissioner in relation to their duties under
the Subdivided Lands Law is handled through the superior court system.
51. d – Enforcement of the general plan by the planning commission is accomplished through
zoning laws.
52. b – Riparian rights have to do with water and include an owner’s reasonable appropriation
of water from a stream or river contiguous to their land.
53. d – Appreciation through population increase is considered an unearned incremental
increase as it is obtained without any expenditure on the part of the owner. While answer
selection B. economic advantage is potentially correct, it is not the answer selection which
best addresses the question.
54. a – A subdivision consists of five or more units, with the exception of timeshares which are
twelve or more.
55. b – A soil pipe is a sewer pipe. Of the alternative answer choices, only C. electrical conduit
is easy to eliminate since the question refers to a pipe, while electrical wires use a conduit.
Answer selection A. drainage pipe may be eliminated on the basis that drainage isn’t usually
dispersed in the soil, but rather sent to a waterway. Answer choice D may be the most difficult
to eliminate if the answer is unknown since clay or adobe may sound similar to soil; however,
this is not material used in modern piping.
56. b – When a subagency is created with the seller’s approval, the subagent is primarily
responsible to the seller, not the original broker.
57. a – This is an EXCEPT question. An agency relationship does not require consideration to
be valid. However, it needs to have mutual consent and a legally competent principal.
58. d – When a broker fails to disclose their dual agency status, the seller does not have to pay the
broker’s fee on a closed transaction. Further, the broker may be liable for the financial losses
suffered by the client (though not more than triple the client’s losses). However, there is no
criminal liability for the failure to disclose a dual agency relationship.
59. c – An ostensible agency occurs when both principals believe the agent represents them, but
the relationship has not been formally disclosed. Answer choices A and B may be eliminated
as nonexistent terminology.
60. d – Defacing occurs when a provision in a signed document is struck out or deleted. Answer
selection C. forgery only applies if the entire document was falsely created. Answer selection
302 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
72. d – The unit of comparison when appraising land depends on the size and use of the subject
parcel. Other than rural properties, land is generally priced by the square foot. Parcels with a
specific frontage, such as a beach, golf course or property for commercial usage, may have the
highest and best value based on the front foot comparison.
73. d – Under a dual agency, the agent may not express any information from one party to the
other regarding the price the buyer may be willing to pay, the terms of payment the seller may
be willing to accept, or confidential financial information of either party.
74. b – The fair market value (FMV) of a property is the price a reasonable, unpressured buyer
would pay for the property on the open market. It represents the amount paid and received
with no duress between principals that are an arm’s length apart (i.e., they are not related by
blood or marriage, or have another affiliation that would influence their behavior).
75. b – Referral of a client to a financially controlled business whose earnings are shared with the
broker requires the broker to provide the client a written affiliated business arrangement
disclosure. While answer choice D is similar, the conflict of interest disclosure is used when the
broker has a personal or professional bias that may interfere with their fiduciary duty, as exists
when the broker is related to the other party in the transaction or has an ownership interest in
a property.
76. a – The agency confirmation provision contained in all purchase agreements states
the existence and nonexistence of each broker’s fiduciary duty owed to the parties of the
transaction. The word “agency,” as appears in the question, is only present in answer choice A.
Confirmation is the third step in the agency disclosure process: disclose, elect and confirm.
77. c – The failure to disclose the fact that the broker is also a partner in the partnership buying
the property allows the seller to withdraw from the sale with no obligation to pay the brokerage
commission. This scenario presents a conflict of interest that needs to be disclosed by the
broker at the moment the conflict arises.
78. b – Accretion is the acquisition of property through natural causes such as a change in a
watercourse. This terminology is related to riparian rights.
79. a – This is a NOT question. An unearned incremental increase does not come from any direct
action by the owner, such as adding an amenity to the property. An unearned incremental
increase is an increase in value that results from factors off the property and out of the owner’s
control.
80. b – Condominium ownership combines an undivided interest in the actual condo unit,
plus a proportionate interest in the common areas.
81. d – To die testate is to die with a will. The terms of the will dictate how the inheritance is
divided.
82. c – To alienate is to transfer an interest in real estate from one person to another. Thus, while a
tenancy, possessory right and an estate for years may grant the right to use and enjoy property,
they do not grant the right to alienate real estate.
83. a – An estate of inheritance is ownership. Fee simple refers to current ownership. A fee
estate grants an indefinite, exclusive and absolute ownership interest in a parcel of real estate
and is the largest bundle of rights to be held in real estate.
84. b – Economic obsolescence occurs off the property. In this question, the existence of airplanes
landing at a local airport refers to a neighborhood effect. All the other answer selections refer to
conditions which exist on the property.
304 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
85. c – Economic obsolescence is a loss in value of a property due to external factors and not the
condition of the property itself. Thus, an oversupply of like-kind properties in the immediate
vicinity of the subject property is a type of economic obsolescence.
86. c – When multiple lenders participate in the same loan it is called a participation loan. Note
that a form of the word appears in the question and the correct answer choice.
87. b – The real estate law requires the broker to read and approve all marketing material
prepared by an unlicensed assistant before it is used.
88. d – This is an UNNECESSARY question. Trust records need to be kept regardless of how the
monies are handled.
89. c – A broker is to maintain a trust fund account separate from their business account to avoid
commingling and converting funds. Here, both answer selections B and D are reasonable
alternatives, although they are not the most precise and best option available.
90. d – A buyer has a statutory two-year period to pursue a seller’s agent for money losses for their
failure to disclose material facts.
91. c – A resident manager or caretaker is required for apartment complexes of 16 units or more.
92. d – The safety clause in an exclusive listing affirms the agent’s right to a fee when any of the
conditions provided as answer selections occur.
93. d – An exclusive right to sell listing may last for whatever period of time is agreed to by
the seller and broker. There is no specified length of time that sets a threshold for an exclusive
listing. Different property types, locations or market condition may affect the mutually agreed-
to length of time.
94. a – An exclusive right to sell listing is required to have a specified termination date that
is agreed to by the participants.
95. a – An irrevocable right to purchase a property for a specific price during a specified period of
time is an option to buy. Answer selection D. right of first refusal, though similar, refers to
an opportunity held by someone (often a tenant or neighbor) to purchase the property under
the same price and terms offered by a third party.
96. b – This is a NOT question. Once the offeree (seller) has notified the offeror (buyer) that the offer
has been accepted, it cannot be revoked.
97. b – Brokers and agents are required to complete 45 hours of CE every four years in order to
maintain their DRE license.
98. d – A salesperson has a written contract with their broker that specifies what the commission
split will be. The commission split is not set by law but through negotiations between the agent
and employing broker. Answer selection B. an express agreement is applicable in some
cases, but may be either written or verbal and is thus not the best answer.
99. a – Brokers are obligated to perform a competent visual inspection when completing the
mandated Transfer Disclosure Statement (TDS) form and disclose any known material facts
that may affect the buyer’s decision to buy the property. A broker is not required to perform
any of the activities described in the other answer selections.
100. d – It is ultimately the seller’s responsibility to deliver the Transfer Disclosure Statement
(TDS) to the buyer.
101. d – The holding of the Easton v. Strassburger court case requires sellers and their agents to
disclose all material facts about a property to a buyer as soon as practicable. This is the case
which prompted the creation and implementation of the Transfer Disclosure Statement
(TDS) form.
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102. d – Sellers in certain transactions do not need to use the statutory Natural Hazard Disclosure
(NHD) statement to make their property disclosures.
103. c – There are two protected types of senior housing. The minimum age limit is either 55 or 62.
The occupancy requirements are also different between the two types.
104. b – This is a NOT question. The only answer choice that is not a violation of real estate law is
the location of her office in her home. All other identified activities are impermissible.
105. c – Commingling is the mixing of personal funds with client or third-party funds, which
includes holding a deposit check uncashed at the broker’s discretion. Answer selection A.
Conversion requires the broker’s personal use of client monies. The other answer selections
have nothing to do with the question.
106. c – Alienation refers to the ability to transfer property. Therefore, alienable title is one that
can be conveyed.
107. d – Title insurance is a form of indemnity insurance by which a title insurance company
holds harmless a person who acquires an interest in real estate against a monetary loss
caused by an encumbrance on title that is not listed in the policy and the insured was unaware
of when the policy was issued. The title insurance company then reimburses the insured for
a later claim.
108. d – This is an EXCLUDED question. There are no title insurance policies that will insure
against zoning or regulation disputes.
109. c – The changing of the market from being advantageous to a seller or buyer will only affect
price. In a buyer’s market, buyers maintain the competitive advantage as prices historically
will go down.
110. a – The principle of conformity states that highest values are achieved by a degree of
similarity in the style, size and quality of a property. Those properties that are more improved
than the conforming level suffer a loss of value. This is called regression.
111. d – This is an EXCEPT question. Functional obsolescence is either out-of-date, inadequate
amenities that do not meet market standards, or over improvements for which the market refuses
to pay the full cost as an amenity. Functional obsolescence is not a matter of maintenance.
112. d – The Agency Law Disclosure is to be attached to a purchase agreement, or exchange
agreement and a lease for greater than one year. It is not required on a month-to-month rental
agreement.
113. d – A listing broker is to disclose all known material facts regarding the property to potential
buyers when showing a listed property. The only exception is confidential personal or financial
information about the seller, or other legal limits placed by the seller.
114. d – This is an EXCEPT question. For an in-house sale, the listing broker cannot represent only
the buyer. An in-house sale refers to one in which the broker or their salespersons are working
with the seller and the buyer.
115. c – Residential use zoning is labeled with an R. Multiple units will have a number following
the R other than 1, the precise number determined by each city or county.
116. c – Ratification is the adoption or approval of an act performed on behalf of a person without
previous authorization after the acts have been performed, such as the approval by a principal
of previously unauthorized acts of an agent. Agency requires mutual consent.
117. d – None of the provided answer selections are required to create a valid agency relationship.
For example, an ostensible agency is neither written nor express. Further, an agency
relationship may be implied or created by a verbal agreement.
306 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
118. c – Finders and brokers, as well as brokers and the public, are capable of being in agency
relationships.
119. b – This is an EXCEPT question. The termination of an easement may occur for any of the
reasons cited in the answer selections, except the release by the servient tenement. The
servient tenement is the party burdened by the easement and they cannot unilaterally
terminate the easement.
120. a – The developer is responsible for the installation of off-site improvements, such as roads,
curbs, gutters and sidewalks, as well as utility hook-ups, fire hydrants and parks in a subdivision.
121. d – A pledge agreement is the document used to secure a loan using another loan as security
where possession is relinquished. This is similar to hypothecation, which also pledges a loan
or property as security, yet possession is retained.
122. c – A lender is required to provide buyers a Loan Estimate within three business days of
the lender’s receipt of the application. The Loan Estimate, which became effective October 3,
2015 under the TILA-RESPA Integrated Disclosure (TRID) rules, states the mortgage terms and
details quoted by the lender.
123. c – To die intestate means to pass away without a will. If a property owner dies intestate, the
probate court will award the estate to the spouse and any children once all creditors have been
paid.
124. b – The Real Estate Settlement Procedures Act (RESPA) regulations apply to one-to-four
unit residential properties. Most disclosure and consumer protection laws are written for
this specific type of targeted property.
125. d – Trust accounts are designed to separate client monies from brokerage business funds.
Commingling, the mixing of client monies with other funds, is the act most frequently
disciplined by the Department of Real Estate (DRE).
126. b – As with a personal checking account, reconciliation refers to a broker balancing a bank
statement with the account ledger. Accounts are generally reconciled on a monthly basis.
127. b – The failure to deliver the statutory Transfer Disclosure Statement (TDS) form to a buyer
prior to the close of escrow gives the buyer the right to cancel the transaction.
128. d – Answer choices A through C describe a tenancy-at-will. A tenancy-at-will, unlike
tenancy-at-sufferance, is done with the owner’s permission. Typically, this follows the
termination of a lease and will evolve into a periodic tenancy if continued beyond a short
duration. However, the tenancy is not limited to a specific duration of time no greater than
one year.
129. c – The Transfer Disclosure Statement (TDS) is required on the sale of all one-to-four
residential unit properties. The TDS is a mandatory disclosure prepared by a seller and given to
prospective buyers setting forth any property defects known or suspected to exist by the seller.
It is generically called a condition of property disclosure.
130. a – When a broker exercises an option to buy they hold during the listing period in order to
resell the property to an existing buyer, the broker violates their fiduciary responsibility to
their client. In this circumstance, the broker has received an improper secret profit.
131. b – An option is a right given for a consideration to another by a property owner to purchase
or lease a property as agreed within a specified time without obligating the person who
receives the right to exercise it. Thus, an option prevents the seller from selling the property to
another during the term of the option. Further, it obligates the seller to perform if the option
is exercised.
132. b – Only when the option is exercised does it bind both parties to the transaction.
Simulated Exam #5 307
133. c – In California, when a married couple buys property jointly, it is presumed to be community
property. This is known as the community property presumption.
134. b – When a non-licensee unlawfully performs real estate services for which a license is required,
the local district attorney is responsible for adjudicating the violation. As the individual is
not a licensee, prosecution is beyond the scope of the Department of Real Estate (DRE). Further,
a federal authority has no jurisdiction when an unlicensed person performs a task requiring a
state license. A county sheriff is similarly not tasked with enforcing crimes of this nature.
135. c – The required lending disclosures under the Real Estate Settlement Procedures Act
(RESPA) and the Truth-in-Lending Act (TILA), such as the TILA-RESPA Integrated
Disclosure (TRID), must be provided to borrowers at no cost.
136. d – Both the lender and the trustor (borrower) benefit from the existence of an impound
account since it guarantees the necessary funds will be available for property taxes and
insurance when they are due.
137. d – If a buyer asks the broker for permission to move into a vacant house prior to the close of
escrow, the broker needs to ask the seller for permission before granting access to the buyer.
Until escrow closes, the property belongs to the seller. Thus, the seller is liable and responsible
for whatever occurs on the property, including any injuries and property damage. Further,
if escrow fails to close, a dispute may arise regarding any alterations the buyer made to the
property.
138. c – The authority of the broker, or the limits to that authority, are determined by what
the client grants. For example, if the client insists on being present during showings of the
property, this condition limits the authority of the broker.
139. d – This is a NOT question. All of the answer selections will terminate the agency relationship,
though some have negative consequences. For instance, if a principal revokes the agency
before the listing has expired, the principal will be liable to the broker for money losses.
140. d – The loss of depth for any reason will most likely increase the price per square foot of the
property since, though the value of the lot may decrease, it will not diminish proportionately
with the reduction in size. For example, a rectangular residential lot that is 60 feet across the
front and 200 feet deep (12,000 square feet total) has a value of $360,000, or $30 per square foot.
If the depth loses 50 feet, either through natural causes or eminent domain, the lot would not
lose a proportional ¼ of its value. The now smaller lot (9,000 square feet) may still be worth
$360,000, with an increase in the price per square foot to $40.
141. d – When making property comparisons for the market approach, the appraiser considers
the entire property and the immediate area, including its location, schools and other off-
site elements that affect value. Answer selections A and C are related to the income approach,
not the market comparison approach. Answer selection B is used for the cost approach and is
employed only for specific types of properties, such as warehouses.
142. c – Remodeling is done to a property to correct functional obsolescence which limits the
practical use of a property. The functionally obsolete element needs to be updated through
remodeling, not simply resolved with repairs or the replacement of an item with the same
thing.
143. c – The sheet metal on the edge of the roof and surrounding various exhaust pipes extending
above the roof is called flashing.
144. a – Wood shake roofs feature open roof sheathing to allow air to circulate. None of the other
answer selections share this design.
308 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
145. a – Property is broadly defined as rights or interest which a person has in a thing owned.
Property may be classified as real or personal. Answer selections B and C are both false as
trade fixtures are personal property and all other fixtures are real property.
146. a – This is a LEAST LIKELY question. A standard policy of title insurance is least likely to
require the title insurance company physically inspect the property. Note that answer selection
B. Abstract of title and D. Preliminary title report are not insurance policies. Answer
selection C. Extended coverage policy suggests something greater than the standard policy,
and thus would be more likely to entail a physical inspection.
147. a – The transfer tax is based on the cash and new debt created in the transfer. In this question,
the amount is $100,000 ($400,000 purchase price – $300,000 assumed note and trust deed).
Determine how many times $500 factors into $100,000: $100,000/$500 = $200. Multiply this
amount by the tax rate: $200 x .55 = $110.
148. d – When multiple offers are submitted on a listed property around the same time, the
fiduciary duty of the listing agent requires them to present both offers to the seller at the
same time so the seller may make a decision while being aware of the existence of both offers.
149. d – A title company performs a title search by viewing the records of the county clerk’s office,
county recorder and the secretary of state. A search of the public records of all entities is required
to determine a property’s chain of title and any relevant records for the buyer or seller (e.g. an
income tax lien). A federal registry of any sort of least likely to contain information relevant to
a property’s title.
150. b – The Real Estate Settlement Procedures Act (RESPA) applies to residential one-to-four
unit properties only. RESPA is federal legislation prohibiting brokers from giving or accepting
referral fees if the broker or their agent is already acting as a transaction agent in the sale of
a one-to-four unit residential property which is being funded by a purchase-assist, federally-
related consumer mortgage. Thus, only answer selection B falls under RESPA.
Challenge Questions 309
CHALLENGE QUESTIONS
1. A buyer purchases a property funded with an adjustable rate mortgage (ARM). After one year,
the interest on the mortgage increases to the fully-indexed rate. What was the interest rate
during the first year of ownership?
a. Par rate. c. Teaser rate.
b. Floating rate. d. Margin rate.
2. What is the best term to describe the interest rate for a mortgage in the secondary mortgage
market without the addition of a yield spread premium or discount points?
a. Annual percentage rate. c. Equity yield rate.
b. Mortgage constant rate. d. Par interest rate.
3. What word best describes a conveyance of title to government land to a private person?
a. Land patent. c. Dedication.
b. Grant. d. License.
4. During a recessionary period, the value of Jeff’s property drops below the balance of the
remaining mortgage debt. Jeff defaults on his mortgage. Before the lender initiates foreclosure,
the lender agrees to reduce the principal balance of the mortgage to the value of the mortgaged
real estate. What term best describes this activity?
a. Mortgage modification. c. Short sale agreement.
b. Mortgage cramdown. d. Capitalization of arrears.
5. Prior to purchasing an income-producing property, an investor calculates the time required
to sell or lease a property within a designated area over a given a period of time. What is the
investor most interested in?
a. Price-to-income ratio. c. Absorption rate.
b. Yield spread. d. Vacancy rate.
6. An owner of a property grants another the right to quarry stone, sand or gravel from the
property for a fee. What is this an example of?
a. Easement. c. Appurtenant right.
b. Use license. d. Profit a prendre.
7. A residential tenant occupies a rental unit. The tenant observes a leaking pipe in the unit,
causing significant damage to the property. The tenant does not notify the landlord of the leak
until prior to the expiration of the lease term. Which of the following is most correct?
a. The tenant committed waste since they neglected the property by failing to inform the
landlord of the leak.
b. The tenant did not commit waste since they did not cause the leak to occur and were
under no legal obligation to correct it.
c. The tenant did not commit waste since the damage was not intentional and the result
of regular wear and tear.
d. The tenant committed waste since they were required to fix the leak and deduct the cost
of the repairs from their next rental payment.
8. A property information package handed to prospective buyers containing disclosures compiled
on the listed property by the seller’s agent is best known as a(n):
a. Transfer Disclosure Statement (TDS). c. Natural Hazard Disclosure (NHD)
Statement.
b. marketing package. d. broker price opinion (BPO).
310 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
19. An informal, non-binding dispute resolution procedure in which a third party works to bring
the disputing parties to their own decision to resolve their dispute is known as:
a. mediation. c. litigation.
b. arbitration. d. repudiation.
20. Cordell owns an undeveloped lot next to Howard. They are uncertain as to the true boundary
line and later agree to establish the location of their common lot line for a period greater than
five years. What is this an example of?
a. Agreed-boundary doctrine. c. Encroachment.
b. Inverse condemnation. d. Adverse possession.
21. Walter, a real estate investor, obtains a mortgage to purchase a single family residence. Walter
rents the property out to members of a protected class and collects rent monthly. Walter
maintains all the rental payments in a trust account without making payments on the
underlying mortgage. Did Walter do anything improper?
a. No, Walter did not exhibit any discriminatory behavior.
b. No, Walter lawfully generated income by purchasing an income-producing rental
property.
c. Yes, Walter committed rent skimming.
d. Yes, Walter committed a trust fund violation.
22. What is conducted by a Home Energy Rater to evaluate the energy efficiency of the home?
a. Home inspection. c. California certified Energy Star audit.
b. Solar appraisal. d. Home energy audit.
23. Multiple co-owners of an improved piece of real estate no longer wish to co-own it. As the
improvements on the property cannot be split up and sold individually, the property is sold
and the proceeds are divided between all owners. What does this illustrate?
a. Hypothecation. c. Partition.
b. Dissolution. d. Subdivision.
24. A farmer in central California purchases raw land to develop as a farm. The soil has a pH level
above seven. What is this in reference to?
a. Acidity. c. Alluvium.
b. Alkalinity. d. Accession.
25. During negotiations of a purchase contract, one party chooses to forego the right to require the
other party to do something. What term most closely aligns with this behavior?
a. Duress. c. Waive.
b. Yield. d. Abandon.
26. A creditor brings an action seeking a money judgment against the owner and a lien on the
owner’s property. The creditor records a lis pendens which clouds title to the owner’s property.
The creditor loses the suit. In a slander of title action, the owner seeks money damages from the
creditor for recording the lis pendens. The recording of a lis pendens is a(n):
a. absolutely privileged publication.
b. conditionally privileged publication.
c. strategic lawsuit against public participation.
d. punitive and judicially barred statement.
312 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
27. A commercial tenant and landlord enter into a lease for an office complex. The tenant agrees
to pay all real estate taxes, building insurance and maintenance costs. What kind of lease
agreement was entered into?
a. Percentage lease. c. Full-service lease.
b. Gross lease. d. Triple-net lease.
28. In modern real estate practice, a guarantee agreement most frequently:
a. places a lien on real estate to secure payment of a mortgage obligation which may be
foreclosed if the terms of the debt are not performed.
b. obligates someone to pay the debt or perform on a contract of another person if that
person defaults or does not perform.
c. obligates someone to contribute an agreed-to amount to help fund the purchase of a
property, generally a friend or relative.
d. secures performance of a debt obligation with a trust deed lien on other property
owned by the borrower.
29. What type of provision in a commercial lease agreement establishes that the initial monthly
rent is to increase in pre-set increments over the term of the lease?
a. CPI adjusted rent provision. c. Market reconciliation rent provision.
b. Dynamic market adjustment. d. Graduated rent provision.
30. What legal system is exemplified by elaborate statutes created to address proper conduct for
the settlement of disputes in advance of them occurring?
a. English civil law. c. English common law.
b. Spanish civil law. d. Spanish common law.
31. The dollar amount of equity in a homeowner’s principal dwelling the homeowner is always
qualified to exempt from creditor seizure is known as a(n):
a. statutory homestead exemption or automatic homestead exemption.
b. automatic homestead exemption or qualifying homestead exemption.
c. Proposition 13 homeowners’ exemption or community property exemption.
d. statutory homestead exemption or Chapter 13 exemption.
32. What term best describes the cause originating from a series of events that, without break
in continuity, results in an agent producing a final buyer under an agency employment
agreement?
a. Fiduciary duty. c. Procuring cause.
b. Referral. d. Due diligence.
33. Buyer Benjamin Smith purchases a property featuring a roof which slopes on all four sides.
What is the best way to describe the roof?
a. Hip roof. c. Gabel roof.
b. Gambrel roof. d. Mansard roof.
34. Existing but unfulfilled requirements for maintenance, repairs and replacements refers to:
a. preventative maintenance. c. deferred maintenance.
b. physical obsolescence. d. habitability requirements.
Challenge Questions 313
35. A provision in a lease agreement specifies that California law will apply if a dispute arises,
such as with a tenant regarding a lease or broker enforcing collection of a fee. What type of
provision is this?
a. Attorney fee provision. c. Intrastate doctrine provision.
b. Interstate doctrine provision. d. Choice-of-law provision.
36. The Uniform Residential Loan Application is also known by what number?
a. 1031. c. 202-1.
b. 1003. d. 64.
37. A report from a title company providing information about a property’s ownership,
encumbrances, use restrictions and comparable sales data is known as a(n):
a. property profile. c. preliminary title report.
b. abstract of title. d. chain of title.
38. If a landlord intends to enter a tenant’s unit to provide maintenance or services, the landlord
must first give the tenant a written notice of the landlord’s intent to enter at least:
a. six calendar days before entering if the notice is mailed.
b. 48 hours before entering if the notice is hand delivered.
c. 24 hours before entering if the notice is posted at the rental office.
d. 24 hours before entering if the notice is mailed.
39. What does “caveat emptor” most closely mean in the context of real estate?
a. “The property is sold as-is.”
b. “The transaction is principal-to-principal.”
c. “Agreed to without caveat.”
d. “Let the buyer beware.”
40. Before the expiration of a lease, a residential landlord or the property manager advises a tenant
of the repairs the tenant needs to perform to avoid deductions from their security deposit. What
activity was conducted?
a. Final walkthrough. c. Joint pre-expiration inspection.
b. Pre-closing confirmation of premises. d. Pre-termination inspection.
41. What does a residential landlord prepare and present to a vacating tenant specifying any repairs
or cleaning to be completed by the tenant to avoid deductions from their security deposit?
a. Joint pre-expiration inspection.
b. Itemized statement of security deposit deductions.
c. Rental period closing statement.
d. Statement of deficiencies.
42. The Section 8 housing program for low-income households provides qualifying tenants with
rent subsidies and minimum habitability standards. What government entity funds Section 8?
a. The city where the rental property is located.
b. The county where the rental property is located.
c. The Department of Housing and Urban Development (HUD).
d. The California Department of Housing and Social Services
43. identify earthquake fault areas and are available from the State Mining
and Geology Board and planning departments.
314 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
b. The period of time following the due date for a payment during which payment
received by the lender or landlord triggers a late charge or increase of the underlying
interest rate.
c. A fee imposed as an additional charge under a provision in a promissory note, lease or
rental agreement when payments are not received by their due date.
d. The period of time following the due date for a payment during which payment
is received by the lender or landlord and after which the missed payment becomes
delinquent and subject to a late charge.
51. A landlord serves a tenant a notice stating the amount of delinquent rent and any other
delinquent amounts owed to the landlord under a rental or lease agreement. What document
did the landlord use?
a. Notice to perform or quit. c. Notice to pay rent or quit.
b. Notice to quit. d. Notice to vacate.
52. An individual’s creditworthiness is primarily determined by their:
a. present income, wealth and previous debt payment history.
b. wealth, debt-to-income (DTI) ratio and net worth.
c. risk factor, age and employment history.
d. previous debt payment history, assets and net worth.
53. A homeowner declares bankruptcy and a federal court liquidates their assets by sale to pay off
their debts. What type of bankruptcy did the homeowner file?
a. Chapter 9. c. Chapter 11.
b. Chapter 7. d. Chapter 13.
54. What type of mortgage is characterized by no monthly mortgage payments with the loan to be
repaid after the borrower dies or moves out?
a. Reverse mortgage. c. Straight note.
b. Shared appreciation mortgage (SAM). d. 5/1 ARM refinance mortgage.
55. A homeowner declares bankruptcy and their financial obligations are restructured, allowing
them to repay their debts over a three-to-five year period. What type of bankruptcy did the
homeowner file?
a. Chapter 7. c. Chapter 13.
b. Chapter 11. d. Section 1031.
56. What is the primary government agency authorized to ensure the proper allocation and
efficient use of state water resources?
a. California Department of Fish and Wildlife.
b. State Water Resources Control Board.
c. Environmental Protection Agency (EPA).
d. United States Bureau of Land Management.
316 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
57. A buyer submits an offer to purchase a property from a seller for $650,000. The seller accepts the
offer and they commit their agreement to writing. The transaction closes and the buyer later
sues the seller, claiming they verbally agreed to sell the property for $550,000. What does this
best represent?
a. Parol evidence.
b. Documentary evidence.
c. Laches.
d. Estoppel.
58. What economic indicator describes an increase over one year in the price level of a basket of
consumer goods and services marketed in the economy?
a. Bull market. c. Supply and demand.
b. Consumer price inflation. d. Laffer curve.
59. The , set monthly by the Internal Revenue Service (IRS), is used by
carryback sellers to impute and report income at the minimum interest when the note rate on
the carryback debt is a lesser rate.
a. floor rate c. federal funds rate
b. applicable federal rate (AFR) d. prime lending rate
60. Broker Isaac represents seller Adams. Isaac locates a willing and able buyer who is not
represented by a buyer’s agent to purchase Adams’ property. On closing, Isaac receives the
entire fee. What is this an example of?
a. Dual agency.
b. A conflict of interest.
c. Double-ending.
d. A pocket listing.
61. Slander of title is best defined as:
a. False and malicious statements disparaging an owner’s title to property and resulting
in money losses to the owner.
b. Malicious though accurate statements disparaging an owner’s title to property and
resulting in money losses to the owner and holder of a senior lien on the property.
c. False and misleading statements about the changing demographics of a community
with the intent to preclude members of a certain protected class from entering.
d. Unintentionally false statements disparaging an owner’s use of their property which
result in money losses to the owner.
62. Base rent is typically lowest under a:
a. gross lease. c. CPI adjusted lease.
b. graduated lease. d. triple net lease.
63. The “habendum clause” in a deed most closely means:
a. “buyer beware.” c. “to have and to hold.”
b. “sold ‘as-is’ without warranty.” d. “highest and best use.”
64. For the purpose of a listing presentation, the seller’s agent prepares a written estimate of the
property’s value for review with the seller. The analysis represents the value of property for sale
based on prices recently paid for similar properties. What is the best name for this document?
a. Comparative market analysis (CMA). c. Appraisal report.
b. Broker price opinion (BPO). d. Sales Comparison Approach.
Challenge Questions 317
74. What effect does an attorney fee provision in an agreement have in the event of a dispute
which leads to litigation?
a. If the attorney has agreed to work pro bono, the attorney for the opposing party may
not collect from their client.
b. It limits the amount an attorney may charge.
c. The prevailing party is to receive treble damages.
d. The prevailing party is to receive attorney fees.
75. Local ordinances which are related to the prevention of excessive rents and maintaining the
availability of existing housing are best classified as:
a. rent control. c. Section 8.
b. restrictive zoning. d. subsidized public housing.
76. A buyer purchases a home on April 20th. What is the seller’s approximate proportional
ownership of the property in the year of the sale?
a. 20%. c. 50%
b. 30% d. 70%
77. Janice transfers her property to her grandparent for as long as they live, stipulating that
ownership will revert to her once her grandparent dies. What is the interest Janice retains on
the grant of the property?
a. Estate for life. c. Estate of inheritance.
b. Reversionary interest. d. Remainder interest.
78. A written schedule which details the apportionment of principal and interest on each periodic
mortgage payment due on an amortizing loan is referred to as a(n):
a. amortization table. c. payment schedule.
b. subaccount ledger. d. prepayment schedule.
79. A notice to vacate is best used by a landlord or tenant to:
a. terminate a periodic tenancy.
b. terminate a fixed-term tenancy.
c. terminate either a periodic or fixed-term tenancy.
d. temporarily displace the tenant so the landlord may perform corrective actions on the
property.
80. What is the term for a consumer purpose loan secured by a one-to-four unit residential property
which meets low-risk criteria and ability-to-repay requirements?
a. Qualified residential mortgage. c. Government-guaranteed mortgage.
b. Prime mortgage loan. d. Pre-qualified residential mortgage.
81. What document does a landlord use to require a tenant to perform an action to remedy a
curable nonmonetary breach of a rental or lease agreement?
a. Option to purchase or vacate.
b. Option to assign curable rights or perform.
c. Notice to perform or quit.
d. Notice to extend or quit.
Challenge Questions 319
82. A buyer and seller enter into a seller financing arrangement in which the seller carries back
a portion of the purchase price. After the buyer takes possession of the property, the economy
enters a recessionary period and the value of the property drops below the amount of the
outstanding debt obligation. The buyer goes into default and the carryback seller forecloses on
their interest in the property. The seller attempts to recover the deficiency in the value of the
secured property though is unable to. What does this illustrate?
a. A recourse mortgage. c. A substitution of security.
b. A nonrecourse mortgage. d. A judicial foreclosure.
83. The loss of money or anything of value due to the failure to perform is best referred to as:
a. surrender. c. forfeiture.
b. foreclosure. d. default.
84. Which term best describes property operating expenses incurred by a commercial landlord and
paid by the tenant as rent in addition to the base rent, adjustments and percentages?
a. Net provisions.
b. Common area maintenance charges (CAMs).
c. Security deposits.
d. Covenants, conditions and restrictions (CC&Rs).
85. A buyer obtains mortgage financing provided by a lender as purchase-assist funding for
the purchase of a one-to-four unit residential property the buyer is going to occupy as their
principal residence. Which of the following terms are most consistent with this scenario?
a. Hard money loan. c. Nonrecourse mortgage.
b. Seller carryback note. d. Reverse mortgage.
86. Which segment of the population would most likely occupy public housing?
a. Military veterans, persons with service animals and protected groups.
b. Low-income families, the elderly and persons with disabilities.
c. Military veterans, the elderly and transient occupants.
d. Persons with criminal records, owners displaced by natural disasters and the elderly.
87. Brokers and agents can sell mobilehomes:
a. that are on a foundation system or registered with the Department of Housing and
Community Development (HCD).
b. that are permanently parked or registered with the Department of Housing and
Urban Development (HUD).
c. that are sold directly through the manufacturer or are new.
d. that are registered with the California Housing Finance Agency or have permanent
utility hookups.
88. Which investment principle refers to the cost of an action that is forgone when choosing to
take an alternative action?
a. Debt leveraging. c. Time-value of money.
b. Sunk cost. d. Opportunity cost.
89. What authorizes the formation of community facilities districts, the issuance of bonds and the
levying of special taxes to finance designated public facilities and services?
320 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
a. Proposition 13.
b. Mello-Roos Community Facilities Act of 1982.
c. Unruh Civil Rights Act of 1959.
d. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
90. A numerical representation of a borrower’s creditworthiness, based on credit information
obtained by the rating bureau, is referred to as a(n):
a. risk factor. c. credit score.
b. debt-to-income (DTI) ratio. d. credit report.
91. Tom meets with multiple lenders to obtain a mortgage to purchase a principal residence.
In addition to Tom’s income, the income from Tom’s partner will also be used to qualify for
the loan and pay back the principal borrowed. After obtaining quotes from two lenders, Tom
ultimately selects a conventional loan with a loan amount greater than the threshold limits
set by Fannie Mae and Freddie Mac. How would you classify Tom’s loan?
a. A non-conforming loan or jumbo loan.
b. A jumbo loan or line of credit.
c. A bridge loan or non-conforming loan.
d. A conforming loan or hard money loan.
92. “Quantitative easing” refers to:
a. The extension of credit by the federal government to multi-family property builders in
an effort to increase the supply of available housing.
b. Actions by the Federal Reserve to increase mortgage lending rates to ease inflationary
pressures during a rapidly rising market.
c. The purchase of government mortgage-backed bonds by the Federal Reserve to drive
down interest rates and increase liquidity.
d. The lowering of city-wide zoning standards to allow construction of buildings with
higher density.
93. Under the principal residence profit exclusion, a married couple is entitled to exclude up to
of profit from a home sale from income taxes.
a. $250,000 c. $750,000
b. $500,000 d. $1,000,000
94. Nonmonetary defaults in leases or mortgages that cannot be cured or undone are an example
of a(n):
a. incurable breach.
b. brutum fulmen breach.
c. minor breach.
d. negligible breach.
95. A real estate investor purchases a property by placing the highest bid for a property at a trustee’s
foreclosure sale. What is the best term to describe this type of buyer?
a. Owner-by-foreclosure. c. Sheriff’s deed holder.
b. Equity purchase investor. d. Grantee by bare legal title.
96. An owner-occupant of a one-to-four unit residential property financed by a purchase-assist
mortgage has the right to default and allow the lender to acquire the property through
foreclosure for the remaining loan amount. What term describes this right?
Challenge Questions 321
12. b – Passive income refers to profits and losses derived from rental real estate in which the
owner is not actively involved. Don’t let the question’s surplus information distract you.
13. a – The Home Mortgage Disclosure Act (HMDA) is a collection of federal laws mandating
data collection on mortgage originations and applications of lenders who meet HMDA
threshold requirements. Though the other answer selections are also related to mortgage
financing regulations, they do not directly relate to data collection and publication.
14. d – Multiple compelling red-herring answer selections are provided. However, when all the
descriptions provided in the question are considered, answer selection D. Adobe is the most
complete answer. When presented with multiple answer selections that are seemingly correct,
choose the most accurate selection.
15. b – Any activity specifically declared by statute to be a nuisance, such as fences of excessive
height or the illegal sale of controlled substances, is a nuisance per se. Contrast this with a
simple nuisance which is more broadly defined as any activity which is injurious to health,
offensive to the senses or obstructs the use and enjoyment of surrounding property.
16. c – All the activities described in the question, known as licensed activities, may only be
performed by a holder of a license issued by the Department of Real Estate (DRE). While the
other answer selections relate to real estate, only answer selection C. specifically covers the
activities requiring a license.
17. b – The activity descried in the question best represents a real estate syndicate. Answer
selection C. Real estate investment trust (REIT) refers to a security traded on the stock
market made up of investments in income generating property, trust deeds and government
securities. Further, answer selection D. Blind pool investment lacks a stated investment
goal for the funds, even though the question specifically comments on the intent to acquire
real property interests.
18. a – A common boundary improvement located on a property line between adjacent properties
is referred to as a party wall. In this question, multiple answer selections run parallel to this
terminology. However, answer selections B. boundary and D. party line lack specificity,
as they do not reference structures. Further, a party wall may refer to a wall between two
adjoining buildings, also called a common wall, which is incompatible with answer selection
C. border fence.
19. a – Mediation is an informal, non-binding dispute resolution voluntarily agreed to in which
a third-party mediator works to bring the disputing parties to their own decision to resolve
their dispute. The Los Angeles Superior court system reports that 63% of cases ordered into
mediation are resolved.
20. a – The agreed-boundary doctrine is also known as the doctrine of practical location. Its
purpose is to resolve boundary disputes by permanently setting the boundary by agreement
between the neighboring owners. However, in modern practice this doctrine is fairly
uncommon as it is only to be used when the true boundary of the properties is not ascertainable.
Further, both owners must also acquiesce to the agreed boundary for a period of time exceeding
the statute of limitations – five years.
21. c – Rent skimming occurs when, during their first year owning a parcel of residential real
estate, an investor receives rents from tenants and fails to apply the rents toward the mortgages
encumbering the property, causing a mortgage delinquency and eventual foreclosure. This
practice can rise to the level of bank fraud, a federal offense. Though the question references
the protected status of the tenants and the existence of a trust account, no details are provided
to indicate Walter did anything inappropriate in these regards.
324 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
22. d – A home energy audit is an inspection which pinpoints a home’s improvements and
features in need of energy-efficient improvements.
23. c – Partition refers to a division of real or personal property or the proceeds therefrom among
co-owners. The partition of real estate may occur voluntarily or by court order, frequently
becoming a lengthy and protracted process.
24. b – The pH scale refers to the level acidity or alkalinity within a soil. A soil with a pH
number below seven is an acid, while one with a pH above seven is an alkaline. In the context
of pH levels, seven is the pivot point which determines classification, and thus ought to be
committed to memory.
25. c – To waive is to forgo a right to enforce or require something. When under a contact,
conditions typically need to be either waived or fulfilled.
26. a – A publication which falls under an absolute privilege bars a slander of title action,
even if the publication is made with actual malice. A communication protected as an absolute
privilege is any publication during a legislative, judicial or other official proceeding authorized
by law, such as a lis pendens.
27. d – Under a triple-net lease, a tenant assumes all the obligations of ownership. It is also
commonly known as a pure-net lease or NNN lease.
28. b – The function of a guarantee agreement is contained in its name — it guarantees the
performance that was agreed to, even if the individual who performs is not the individual
originally named in the contract. Though the other answer selections seem viable, they are too
narrow and specific to best address what the question is asking.
29. d – A graduated rent provision in a commercial lease agreement periodically increases the
initial monthly rent in pre-set increments over the term of the lease. Graduated rent provisions
increase the monthly rent due in the years following the first year’s payment of a base rent.
The adjustments are made annually, or sometimes semi-annually. The periodic upward
adjustment is either a specific dollar amount or a percentage of the base year rent or rent paid
during the previous period.
30. b – Spanish civil law attempts to settle legal disputes by establishing elaborate statutes to
address the issues in advance of the disputes, rather than on a case-by-case basis. Alternatively,
under the common law of England, legal disputes are decided on a case-by-case basis before a
judge.
31. a – Automatic homestead exemption is the most frequently used term though it is also
known as a statutory homestead exemption. Since the exemption is statutorily provided in
the California Code of Civil Procedure, it is automatic. The exemption gives a homeowner
priority rights to preserve the equity in their home from loss, due to a creditor’s foreclosure
on a judgment lien recorded junior in time to the declaration, in the dollar amount of the
homestead exemption the owner qualifies to claim.
32. c – The procuring cause of a real estate transaction is the interaction between a principal
and a real estate licensee which ultimately results in the fulfillment of the objective of the
employment, such as the sale of a property. The procuring cause doctrine is frequently employed
in the context of open listings, in which a broker renders real estate services on a best-efforts
basis. A fee is due to the broker if they achieve the client’s objective of the employment before
the client or another broker separately meets the objective.
33. a – A hip or hipped roof is sloped in two pairs of directions, such as north to south and east to
west. Contrast with a gable roof, which slopes in just one pair of directions like an inverted V.
Challenge Questions 325
45. a – An option to renew and an option to extend are related concepts. Though the language
of the question is opaque, the key distinction to extract from the question is that the option
creates a new lease on the same conditions as the expiring lease. Contrast this with an option
to extend which prolongs the period of possession under an existing lease.
46. c – Normal wear and tear is naturally occurring damage to an income-producing property
due to aging and the ordinary use of its occupants. It is not caused by deliberate abuse or
neglect of a property.
47. d – Two types of assessment charges exist to fund the expenditures of a homeowners’ association
(HOA). The first are classified as regular assessments, which fund the operating budget to
pay for the cost of maintaining the common areas. The second type are special assessments,
which are levied to pay for the cost of repairs and replacements that exceed the amount
anticipated and funded by the regular assessments.
48. b – A notice to quit is served on a tenant for an incurable breach of a rental or lease
agreement or due to a statutory breach of the tenancy, such as conducting criminal activities
or inflicting extensive damage to a property.
49. b – A material breach is a significant contractual breach that prevents the completion of the
agreed upon activity. In this instance, the buyer’s failure to obtain financing prevented them
from performing under the contract.
50. d – A grace period is the time period for a lender’s or mortgage holder’s receipt of a payment
following its due date after which the missed payment becomes delinquent and subject to a
late charge.
51. c – A notice to pay rent or quit states the amount of delinquent rent and any other delinquent
amounts owed the landlord under a rental or lease agreement. The other answer selections
either do not give the tenant the option to pay delinquent amounts and retain possession, or
require the tenant to perform an action to remedy a curable nonmonetary default.
52. a – Many of the answer selections reference factors which in some way affect an individual’s
creditworthiness. However, only answer selection A. contains all the primary factors –
colloquially known as the three C’s of credit: capacity, capital and character. Further, the
other answer selections contain overlapping concepts and thus do not sufficiently cover the
breadth of the concept.
53. b – Chapter 7 bankruptcy requires the insolvent homeowner in bankruptcy to repay their
debt from whatever assets they possess, unless those assets are lower than state-allowed levels
of assets and income. In Chapter 7 bankruptcy, a home without equity is counted among these
assets and foreclosed upon.
54. a – A reverse mortgage enables the borrower to access the unencumbered value of the
property and forgo a monthly mortgage payment. Perhaps the most identifiable characteristic
of a reverse mortgage is the fact they are reserved for the elderly. Though the question
doesn’t directly reveal the elderly status of the borrower, it can be inferred based on the other
characteristics described.
55. c – Chapter 13 bankruptcy requires the homeowner to repay their delinquent debts over a
longer period of time than contracted for, after deducting reasonable living expenses. When
a dissimilar answer selection is provided, like selection D. Section 1031, it is commonly
the correct answer. However, this test-taking strategy is not a hard rule, as illustrated in this
question where the outlier is incorrect.
Challenge Questions 327
56. b – The mission statement of the State Water Resources Control Board is “to preserve,
enhance, and restore the quality of California’s water resources and drinking water for the
protection of the environment, public health, and all beneficial uses, and to ensure proper
water resource allocation and efficient use, for the benefit of present and future generations.”
57. a – Parol evidence is a rule that prevents a party to a written contract from presenting outside
evidence clarifying the written terms of a contract that appears to be whole, complete and
finalized. The parol evidence rule can be remembered as “the outside evidence rule.” Outside
evidence is not to be used when a written contract exists that has been mutually agreed to by
the participants.
58. b – This statement best represents consumer price inflation. Consumer price inflation is
an increase in the general price level of all goods and services consumed in the economy,
frequently depicted as a “basket of goods.”
59. b – The applicable federal rate (AFR) is the minimum interest rate that the Internal Revenue
Service (IRS) allows for private loans and carryback transactions. The IRS publishes a monthly
set of interest rates it considers to be the minimum market rate for loans and carryback debt.
60. c – Double-ending occurs when the seller’s broker receives the entire fee in the transaction as
there is no buyer’s agent to split the fee with. The collection of a fee is separate and apart from
the imposition of agency duties, and thus answer selection A. dual agency is a tempting red
herring, but is not the best answer.
61. a – A Slander of title claim typically results when a person or entity publishes false and
malicious statements which disparage or cloud an owner’s title to property, causing a financial
loss. An absolutely privileged publication during a legislative or judicial proceeding, such
as a lis pendens, bars a slander of title action.
62. d –A triple net lease passes the responsibility for all costs and maintenance of the property
to the tenant, including property taxes, insurance, and common area maintenance. As the
tenant agrees to shoulder these additional expenses, the base rent is typically lower to remain
competitive.
63. c – In real estate contracts, the “habendum clause” references the transfer of ownership rights
in a property and lists any restrictions or limitations on the rights transferred. As the clause
begins with the phrase, “To have and to hold,” the habendum clause is also known as the “to
have and to hold clause.”
64. a – A comparative market analysis (CMA) is a worksheet used by an agent to prepare an
estimate of a property’s value for review with a property owner for the purpose of a listing
presentation. Note this question contains multiple tempting red herrings. Answer selection
B. Broker price opinion (BPO) is a parallel concept, though not necessarily used as part of a
listing presentation. Further, answer selection C. Appraisal report fails since it is prepared by
an appraiser, not the seller’s agent.
65. d – Building permits are issued by a city or county building department authorizing
commencement of construction. The construction is to be consistent with regulations for
buildings within a municipality as established under building codes.
66. b – Under English Common Law, incorporeal property was an intangible right affecting a
tangible item, such as the collection of rents or a right to enforce a debt. Incorporeal rights are
the opposite of corporeal rights, which refers to the right of ownership in material things, such
as land and chattel.
67. b – Arbitration avoids the judicial system and may be less costly. However, decisions by
third-party arbitrators are final and cannot be appealed, leaving no room for judicial oversight
to ensure the arbitrator’s award is proper.
328 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
68. c – This question addresses tenant improvements made to a leased property to meet the needs
of the occupying tenant. The provision which controls the handling of tenant improvements
on expiration of a lease is the further-improvements provision.
69. d – Answer selection B. Tenancy-at-will refers to a flexible leasehold interest granted to a
tenant with no fixed duration or rent owed. Answer selection C. Holdover tenancy refers to
the tenant’s continued possession of a property after the lease expires without the consent of
the landlord. The most tempting red herring is answer selection A. Option to renew. However,
an option to renew creates new lease agreement on the same conditions as the expiring lease
agreement, versus an extension of possession under an existing lease agreement.
70. d – Intermediation refers to the process of pooling and supplying funds for investment by
financial institutions called intermediaries. The process is dependent on individual savers
placing their funds with these institutions and forgoing opportunities to directly invest in the
investments selected.
71. d – A contingency fee is compensation paid on the occurrence of an event. A provision in an
offer to lease which states the broker’s fee is payable on the transfer of possession to the tenant
is an example of a contingency fee.
72. b – Restoration is the return of funds and documents on a rescission of a purchase agreement
sufficient to place all the parties in the position they held before entering into the agreement.
Answer selection A. Rescission refers to the cancellation of the contract itself, not the
return of the financial instruments to the respective parties. Answer selection C. Reversion
exists in the context of landlord-tenant law, not a purchase transaction. Answer selection D.
Renunciation occurs when an individual who has been granted something or has accepted
something later gives it up or rejects it, as occurs when an agent withdraws from an agency
relationship.
73. a – A leasehold interest for which rent is based on the rental value of the underlying land
is known as a ground lease. The other answer selections do not appropriately relate to the
subject of the question.
74. d – Attorney fees provisions guarantee attorneys’ fees in litigation.
75. a – Rent control ordinances are intended to prevent excessive rents and maintain the
availability of housing. A related concept is answer selection C. Section 8, which is a
government housing program for low-income households that provides qualifying tenants
with rent subsidies and minimum habitability standards. Section 8 is administered by the
Department of Housing and Urban Development (HUD), and is thus a federal program. Further,
answer selection D. subsidized public housing refers to government-owned properties.
76. b – This question illustrates the concept of pro rata, a Latin term meaning “in proportion.” To
determine the seller’s proportional ownership of the property in the year of the sale, divide
the number of days the seller owned the property (110) by the number of days in the year
(365), approximately 30%. Conversely, the buyer’s proportional ownership of the property in
the year of the sale is approximately 70%. As some real estate expenses are paid annually or
monthly in advance by the seller, they need to be prorated when the property sells.
77. b – A reversionary interest refers to the future interest a person retains on the grant of
property which reverts to the grantor on the occurrence of an event, such as the death of the
grantee. Answer selection A. Estate for life, also called a life estate, is a compatible concept,
referring to a freehold estate in land held by a person who is entitled to use of the property for
the duration of their life or the life of another. However, the question asks for the terms used to
describe the interest in the property held by the grantor.
Challenge Questions 329
78. a — Answer selection B. subaccount ledger is used in trust fund accounting. Answer
selection C. payment schedule is in reference to all the monthly payments to be made on a
mortgage on a scheduled calendar basis until it is paid in full, and does not directly address the
apportionment of principal and interest on each periodic payment as would be contained in
an amortization table.
79. a – A notice to vacate may be used to terminate a periodic tenancy, though it cannot be used
to terminate a fixed-term tenancy during its term.
80. a – A qualified residential mortgage (QRM) meets low-risk criteria, exempting it from the
originating lender’s ownership of 5% under the risk retention rule. QRMs are expected to meet
ability-to-repay requirements, including the maximum debt-to-income ratio of 43%.
81. c – A notice to perform or quit requires a tenant to perform an action to remedy a curable
nonmonetary breach of a rental or lease agreement. This is contrasted with a notice to pay rent
or quit, which is premised on a monetary breach, or a simple notice to quit, used when the
tenant commits an incurable breach.
82. b – A mortgage subject to anti-deficiency laws do not permit the mortgage holder, whether
a lender or carryback seller, to pursue a borrower to collect any loss due to a deficiency in the
value of the secured property on foreclosure or a short payoff.
83. c – Forfeiture is the loss of money or anything of value due to the failure to perform.
While multiple other answer selections are also partially correct, forfeiture best matches the
description as it is defined broadly. The other answer selections are premised around a specific
activity.
84. b – Leases on commercial properties often include common area maintenance charges
(CAMs). CAMs are intended to be expenses incurred by the landlord and paid by the tenant as
rent additional to the base rent, adjustments and percentages. However, the use of CAMs set
as a percentage of the base rent are used to effectively increase rental income, and make the
property’s published rental rate appear advantageous, without ever incurring or accounting to
the tenant for amounts spent.
85. c – The question describes a purchase-money mortgage, which is nonrecourse debt which
affords anti-deficiency protections.
86. b – Public housing is subsidized. It is generally reserved for low-income families, the elderly,
and persons with disabilities. Only answer selection B. Public housing specifically addresses
these three primary characteristics.
87. a – A mobilehome is property designed to be used as a dwelling, classified as either personal
or real property depending on the method of attachment. A broker or agent may sell an
unattached mobilehome after it has been registered with the Department of Housing
and Community Development (HCD), which provides title documents. A mobilehome is
registered when it is first sold and occupied, thus a broker or agent would not be involved
in the sale of a new mobilehome, as referenced in answer selection C. Alternatively, when a
mobilehome is installed on a foundation, thus becoming a manufactured home, it is no longer
registered with the HCD. As the property is attached, it is classified as real estate and may
therefore be sold by brokers and agents.
88. d – The cost of an action that is forgone when choosing to take an alternative action, usually
aconsideration when making one investment over another, is known as an opportunity cost.
For example, funds attributed to one investment can’t also be applied to a different investment
opportunity at the same time.
330 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
89. b – The Mello-Roos Community Facilities Act of 1982, commonly known more simply as
Mello-Roos, are special districts created by a local government for the purpose of obtaining
additional funding for local projects. In this way, a Mello-Roos tax is a type of parcel tax that
was implemented in response to the passing of Proposition 13 (Prop 13) in 1978.
90. c – The disclosure of a consumer’s credit score information which reflects their creditworthiness
is required by the Fair Credit Reporting Act (FCRA).
91. a – A non-conforming loan is a conventional loan with a loan amount greater than the loan
amount limits set by Fannie Mae and Freddie Mac. Non-conforming loans are also known as
jumbo loans. Notice how this question contains numerous facts which do not factor into the
formulation of the correct answer. These are distractions intended to lead you away from the
correct answer. Once you determine they are immaterial, ignore them.
92. c – Quantitative easing is a monetary policy in which the Federal Reserve (the Fed)
purchases predetermined amounts of government bonds or other financial assets to inject
money directly into an ailing economy. It was last implemented in the American economy
following the Millennium Boom and Bust.
93. b – Each individual owner is able to exclude up to $250,000 of their profit on the sale of their
principal residence. As the question references a married couple, both owners may each
exclude $250,000, totaling $500,000.
94. a – A tenant needs to vacate and deliver possession of a rented property to the landlord within
three days after service of written notice to quit for the breach of any terms of the rental or
lease agreement which cannot be performed or rectified – i.e., breaches which are incurable.
95. a – The winning bidder at a trustee’s sale who takes title to the property sold by a trustee’s deed
is an owner-by-foreclosure. The other answer selections are not specific to a foreclosure sale
which is referenced in the language of the question. Further, a sheriff’s deed, as referenced in
answer selection C., is issued in connection with a judicially ordered sale of property to satisfy
a judgment.
96. c – A default is the borrower’s act of exercising the put option contained in the provisions of
all mortgages. On default, the mortgage holder is forced to sell the secured property through a
foreclosure sale to satisfy the amounts owed.
97. c – A restrictive endorsement creates a constraint or restriction on a financial instrument,
generally a check. In this example, the check may only be deposited into an account by the
payee, not cashed.
98. a – A credit application is used both in the context of leasing and borrowing. Alternatively,
a credit report is a compilation of a buyer’s collected credit history.
99. d – The three main categories of income are active income, passive income and portfolio
income. Portfolio income is income from investments such as bonds, dividends and trust
deeds.
100. c – Expansive soils expand when water is added then shrink when they dry out. Such
continuous change in soil condition can cause property built on this soil to settle unevenly
and crack.
Real estate glossary 331
B
balloon payment 65, 66, 77, 202
Any final payment on a note which is greater than twice the amount of any one of the six regularly
scheduled payments immediately preceding the date of the final/balloon payment.
bankruptcy, Chapter 13 326
A proceeding in which the homeowner’s financial obligations are restructured, allowing them to
repay their debts over a three-to-five year period.
bankruptcy, Chapter 7 326
A proceeding in federal court liquidating the homeowner’s assets by sale to pay off their debts.
beneficiary 66, 72, 144, 172, 216
One entitled to the benefits of a trust. One who receives benefits from an estate, the title of which is
vested in a trustee. The lender holding a note and deed of trust.
beneficiary statement 73
A document issued by a lender on request noting future payment schedules, interest rates and
balances on a mortgage assumed by an equity purchase (EP) investor.
bilateral contract 126, 134, 135, 206, 236
A promise for a promise, such as a purchase agreement or a listing agreement.
blanket mortgage 77
A mortgage which is secured by two or more parcels of real property.
blockbusting 102, 113
The prohibited practice of a real estate licensee inducing a property owner to list their property for
sale is response to a change taking place in the neighborhood demographics.
Real estate glossary 335
C
California Housing Finance Agency (CalHFA) 68, 76
An independent California state agency that makes low-rate housing loans through the sale of
taxable and tax exempt bonds.
California Land Title Association (CLTA) title policy 84, 91, 92
The standard title insurance policy.
CalVet 68, 73, 94, 175, 177
A program administered by the State Department of Veterans Affairs for the direct financing of farm
and home purchases by eligible California veterans of the armed forces.
call 175
A lender’s demand for the balance of the loan to be immediately paid in full.
336 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
D
debt 65, 130, 144, 284
Money due from one person or another; obligation, liability.
debtor 65, 130, 145
A person who owes money to another.
debt-to-income ratio 64, 77
Percentage of monthly gross income that goes towards paying debt.
deciduous 200
A tree that loses its leaves each year.
declaration of homestead 258
A document signed by a homeowner and filed with the county recorder’s office to exempt the
owner-occupant’s dollar homestead equity from seizure by creditors.
deed 20, 85, 92, 144, 182
Written instrument which when signed and delivered (executed) conveys title to real property
from one person (grantor) to another (grantee).
deed-in-lieu of foreclosure 71, 73, 109
A deed to real property accepted by a lender from a defaulting borrower to avoid the necessity of
foreclosure proceedings by the lender.
default 70, 73, 135, 204, 236
Failure to fulfill a duty or promise or to discharge an obligation; omission or failure to perform a
promised act.
deferred maintenance 325
Existing but unfulfilled requirements for maintenance, repairs and replacements. Postponed or
delayed maintenance causing decline in a building’s physical condition.
340 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
E
earnest money 174
Down payment made by a purchaser of real estate as evidence of their good faith intent to buy. A
deposit or partial payment.
easement 20, 29, 212, 227, 232
A right held by one property owner to use the land of another for a specific purpose, such as ingress
and egress to the owner’s property.
easement in gross 259
An easement which belongs to an individual and is not appurtenant to or transferred with a
property.
economic life 54, 57, 209, 233, 260
The period of time over which a property will yield a return on capital invested to own it.
economic obsolescence 56, 58, 198, 285, 290
A loss in value of a property due to external factors and not the condition of the property itself.
effective age 59
The physical age of a property based on the condition of the structure, distinct from its
chronological age.
elements of value 50, 54, 57, 204
Factors that must be present for real estate to have value: demand, utility, scarcity and
transferability.
eminent domain 22, 27, 59, 88, 253
The right of government to take private property for public use. The government on the taking pays
the owner the fair market value of the property.
encroachment 20
An improvement on one parcel of real estate which extends onto real estate belonging to another
person.
encumbrance 20, 77, 84, 198, 258
Any claim or lien on a parcel of real estate, such as trust deeds, CC&Rs, easements, taxes or
assessments.
enforceable contract 133, 134, 179
An agreement which meets minimum elements needed to be enforceable in court.
environmental hazards 23, 30, 110, 115, 208
Noxious or annoying man-made conditions which are injurious to health or interfere with an
individual’s sensitivities.
342 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
eviction 197
An unlawful detainer action to physically remove a tenant from their wrongful possession of
property.
exchange 126, 134, 174, 210
A trading between two or more owners of their equities in different properties.
exclusive agency listing 135, 210
An agreement employing a broker as the sole agent for the seller of real property in which the seller
promises to pay the broker a fee if the property is sold unless the sale is by the owner acting without
the services of any agent.
exclusive right-to-sell listing 128, 136, 173, 282, 291
An agreement employing a broker to act as agent for the seller of real property in which the seller
promises to pay the broker a fee if the property is sold during the period of the employment,
whether by the broker, through another broker or by the efforts of the owner.
execution 23, 93, 94, 170, 178
The signing and delivery of a document, as occurs on a seller’s acceptance of an offer to buy real
estate by signing and delivering the signed document to the buyer.
expansive 330
Soils that expand when water is added then shrink when they dry out. Such continuous change in
soil condition can cause property built on this soil to settle unevenly and crack.
F
fair housing laws 101, 120, 235, 257, 264
A collection of laws designed to prevent discrimination in the access to housing based on an
occupant’s inclusion in a protected class. Title VIII of the 1968 Civil Rights Act.
fair market value 50, 58, 289
The price a reasonable, unpressured buyer would pay for property on the open market.
Fannie Mae 68, 70, 74, 266
A government-sponsored entity buying, owning and selling mortgages in the secondary mortgage
market, called the Federal National Mortgage Association (FNMA).
Federal Fair Housing Act 101, 120, 230, 239
A collection of policies designed to prevent discrimination in the access to housing based on an
occupant’s inclusion in a protected class.
Federal Housing Administration (FHA) 68, 74, 254, 263, 267
An agency of the federal government that insures private mortgage loans for financing of new and
existing homes and home repairs.
Federal National Mortgage Association (FNMA) 68, 70, 74, 266
Called Fannie Mae, is a quasi-public agency whose primary function is to buy, own and sell
mortgages in the secondary market.
Federal Reserve 64, 73, 236, 265, 267
The federal banking system of the United States managed by a central board of governors (Federal
Reserve Board) and comprising a bank in each of twelve geographical districts with broad powers
for setting monetary policy to control the level of price inflation and employment, primarily
accomplished through the setting of short-term interest rates.
344 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
fee estate 20
An indefinite, exclusive and absolute ownership interest in a parcel of real estate, the largest
bundle of rights to be held in real estate.
fee simple estate 85
The greatest interest that one can have in real property. An estate that is unqualified, of indefinite
duration, freely transferable and inheritable.
fiduciary duty 38, 41, 182, 225, 231
That duty owed by an agent or trustee to act in the highest good faith toward the principal and
not to obtain any advantage over their principal by the slightest misrepresentation, concealment,
duress or undue influence.
financial analysis 53
The consideration of the durability, quantity and quality of income and expenses generated and
incurred by an income-producing property.
finder 34, 103, 143, 293
An unlicensed individual who solicits, identifies and refers potential clients to brokers, agents or
principals in exchange for the promise of a fee.
first-time homebuyer 145
A buyer of property who has not previously owned real estate. Typically aged 25-34.
fixed-term tenancy 20
A leasehold interest held by the tenant, running for the specific lease period as set in a lease
agreement. A fixed-term tenancy automatically terminates at the end of the lease period without
further notice.
fixture 18
Components attached to the land or improvements, which usually cannot be removed without
agreement as they become real property; examples plumbing fixtures, store fixtures built into the
property, etc.
flashing 296
Thin pieces of impervious material such as sheet metal installed to prevent water seepage into a
structure from a joint.
flipper 145
A speculator who purchases real estate at perceived below-market prices and depends on market
momentum to sell at a profit.
forbearance agreement 69
An agreement that the lender will temporarily reduce monthly mortgage payments for the
homeowner at risk of default, without altering the original loan terms.
foreclosure 70, 72
A mortgage holder’s remedy on a default in their mortgage by initiating a procedure noticing the
sale of the mortgaged property to pay the debt.
forfeiture 329
Loss of money or anything of value, due to failure to perform, a remedy abhorred by the courts.
Real estate glossary 345
G
general duty 38, 42
The duty a licensee owes to non-client individuals to act honestly and in good faith with upfront
disclosures of known conditions which adversely affect a property’s value.
general plan 24, 286
Development policies for acceptable land uses within a jurisdiction.
government loan programs 74
State and federal programs designed to facilitate homeownership, such as Federal Housing
Administration (FHA)-insured loans, U.S. Department of Veterans’ Affairs (VA)-guaranteed loans,
and the California Housing Finance Agency (CalHFA).
grace period 119
The time period following the due date for a payment during which payment received by the
lender or landlord is not delinquent and a late charge is not due.
graduated payment mortgage 66, 76
A mortgage providing for installment payments to be periodically increased by predetermined
amounts to accelerate the payoff of principal.
graduated rent provision 324
A rent provision in a nonresidential lease agreement which periodically increases the initial
monthly rent in pre-set increments over the term of the lease.
grant deed 85, 93, 173, 199, 226
A document used to pass a fee simple interest in real estate from the grantor to another individual,
unless a lesser interest is stated.
grantee 85, 144, 147, 226
An individual acquiring an interest in title to real estate.
grantor 85, 134, 144, 146, 226
A capable individual conveying an interest in real estate.
346 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
H
habendum clause 327
The “to have and to hold” clause in a deed.
habitable condition 119
The minimum acceptable level of safety, utility and sanitation permitted in a residential rental.
hard money loan 76
Real estate loans made by private lenders funded in cash.
hazardous waste 228
Any products, materials or substances which are toxic, corrosive, ignitable or reactive.
heir 145
One who inherits property on the death of an owner.
highest and best use 57, 185, 224, 253, 260
An appraisal phrase addressing the use of a property which is most likely to produce the greatest
net return on the land and/or buildings over a given period of time.
hip roof 324
The roof of a property that slopes on all four sides.
hold harmless clause 136
A provision in an agreement that shifts liability between parties.
holdover tenant 144
A tenant who retains possession of the rented premises after their right of possession has been
terminated.
home energy audit 324
An audit conducted by a Home Energy Rater evaluating the energy efficiency of the home.
home equity line of credit (HELOC) 65, 77
A mortgage loan enabling a homeowner to borrow against their home’s equity, as though the
equity was an ATM.
Real estate glossary 347
I
implicit discrimination 42
Actions which are not openly discriminatory but yield discriminatory results.
implicit rent 64
The dollar value of the use of a property by the owner.
implied warranty of habitability 93
An unwritten provision, included by statute, in all residential lease agreements requiring the
landlord to provide safe and sanitary conditions in the rental unit.
impound account 65, 74, 295
A money reserve of a mortgage borrower’s funds held by a lender or carryback seller to pay for
annual property obligations owed by the owner to others.
income approach 52, 59, 152, 225, 265
One of three methods of the appraisal process applied to income producing property to develop the
appraiser’s opinion of value.
incorporeal rights 327
Nonpossessory rights in real estate arising from its ownership, such as rents.
incurable breach 329
Nonmonetary defaults in leases or mortgages that cannot be cured or undone.
independent contractor 116, 155, 208, 230
A salesperson employed by a broker under an employment arrangement which avoids income tax
withholding and unemployment benefit payments by the broker.
inflation 74
The price change in consumer goods and services, stated in the consumer price index (CPI) as a
figure which is reported as a percentage change over one year ago.
influences on value 50
An aspect of the principle of change, recognizing the effect of physical, economic, government and
social changes on real estate value.
348 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
J
joint pre-expiration inspection 325
An inspection conducted by a residential landlord or the property manager to advise a tenant of
the repairs the tenant needs to perform to avoid deductions from their security deposit.
joint tenancy 89, 91, 284
Ownership of an interest in property concurrently conveyed to two or more individuals who share
equally and have the right of survivorship.
joist 19, 259
A horizontal support running between a property’s foundations, walls, or beams to support its
ceiling or floor.
Real estate glossary 349
K
kickback 68, 117, 179, 181, 284
A fee improperly paid to an transaction agent who renders no service beyond the act of referring in
exchange for a referral fee when the agent is already providing another service in the transaction
for a fee.
L
land sales contract 67, 86, 135, 176, 229
An agreement infrequently used by a carryback seller in a sale of real property to retain title to the
property until all or an agreed part of the purchase price has been paid. Also commonly called a
land -contract, conditional sales contract, installment sales contract or real property sales contract.
landlord 144, 206, 234, 239, 290
One who rents their property to another. The lessor under a lease.
late charge 67
A fee imposed as an additional charge under a provision in a promissory note, lease or rental
agreement when payments are not received by their due date or during a grace period.
lead-based paint hazard 30, 110, 239, 283
Any condition that causes exposure to lead from lead-contaminated dust, soil or paint which has
deteriorated to the point of causing adverse human health effects.
lease agreement 107, 120, 144, 236, 282
The document entered into be a landlord and tenant granting the right to possession and setting
the rent and terms of a fixed-term tenancy.
leasehold estate 20, 27
A tenant’s right to occupy real estate during the term of the lease.
leasing agent 143, 266
A broker who markets the availability of space to rent and locates and negotiates the terms of a
lease with suitable tenants.
legal description 253, 256
The description used to locate and set boundaries for a parcel of real estate.
lessee 21, 144, 146, 255
One who contracts to occupy and use property for the payment of rent under a lease agreement; a
tenant.
350 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
M
market comparison 52, 55, 254, 285, 296
An appraisal method used by an appraiser to arrive at a property’s value by a comparison of recent
sales prices of similar properties, adjusted for differences in the properties.
marketing package 322
A property information package handed to prospective buyers containing disclosures compiled on
the listed property by the seller’s agent.
material breach 326
A significant contractual breach that prevents the completion of the agreed upon activity.
material defect 290
Information about a property which might affect the price and terms a prudent buyer is willing to
pay for a property.
material fact 36, 110, 115, 139, 207
A fact that, if known, might cause a prudent buyer or seller of real estate to make a different
decision regarding what price to offer or demand for a property or whether to remain in a contract
or cancel it.
mechanic’s lien 28
A lien created by statute which exists against real property in favor of persons who have performed
work or furnished materials for the improvement of the real property.
mediation 323
An informal, non-binding dispute resolution voluntarily agreed to in which a third-party mediator
works to bring the disputing parties to their own decision to resolve their dispute.
Mello-Roos 330
The Mello-Roos Community Facilities Act of 1982 authorizes the formation of community facilities
districts; the issuance of bonds, and the levying of special taxes thereunder to finance designated
public facilities and services.
metes and bounds 22, 26
A term used in describing the boundary lines of land, setting forth all the boundary lines together
with their terminal points and angles. Metes (length or measurements) and Bounds (boundaries)
descriptions are used when accuracy as to the exact location of the line is required.
misrepresentation 39, 115, 205, 231
A false or misleading statement or assertion given to another to induce them to do something.
352 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
N
narrative report 53, 56, 288
A summary of all factual materials, techniques and appraisal methods used by the appraiser in
establishing the value of a property. This is the most thorough type of appraisal report.
Natural Hazard Disclosure Statement (NHD) 109, 115, 283, 292
A report provided by a local agency or NHD vendor and used by sellers and seller’s agents to
disclose natural hazards which exist on all properties held out for sale.
negative amortization 78
Occurs when monthly installment payments are insufficient to pay the interest accruing on the
principal balance, requiring the unpaid interest to be added to principal.
negative equity 70, 71
The condition of a property owner owing more on a mortgage than the current fair market value of
the encumbered property.
Real estate glossary 353
negligence 103
The failure to behave with the level of care that someone of ordinary prudence would have
exercised under the same circumstances.
net lease 21, 200
A commercial lease which transfers to the tenant the obligation, unless modified, to pay all of the
costs of ownership in addition to utilities and janitorial services.
net listing 106, 129, 136
A type of listing in which the agent’s fee is set as all sums received exceeding a net price established
by the owner.
non-conforming loan 330
A conventional loan with a loan amount greater than the loan amount limits set by Fannie Mae
and Freddie Mac. Non-conforming loans are also known as jumbo loans.
nonjudicial foreclosure 70, 211
When property is sold at a public auction by a trustee as authorized under the power-of-sale
provision in a trust deed.
nonrecourse mortgage 319
A mortgage subject to anti-deficiency laws which do not permit the mortgage holder (lender or
carryback seller) to pursue a borrower to collect any loss due to a deficiency in the value of the
secured property on foreclosure or a short payoff.
note 65, 74, 130, 144, 146
A document, often secured by a trust deed on real estate, evidencing an obligation to pay money to
a creditor, usually a lender or carryback seller.
notice of default (NOD) 71, 74
The notice filed to begin the nonjudicial foreclosure process. Generally, the NOD is filed following
three or more months of delinquent mortgage payments.
notice of entry 325
A document served on a tenant giving them advance notice of a landlord’s intent to enter a
tenant’s unit to perform maintenance, make repairs or inspect.
notice of nonresponsibility 28
A notice used by a landlord to declare that they are not responsible for any claim arising out of the
improvement being constructed on their property by the tenant.
notice to pay rent or quit 326
A notice served on a tenant by the landlord which states the amount of delinquent rent and any
other delinquent amounts owed the landlord under a rental or lease agreement.
notice to perform or quit 329
A notice requiring a tenant to perform an action to remedy a curable nonmonetary breach of a
rental or lease agreement.
notice to quit 329
A notice to vacate served on a tenant for an incurable breach of a rental or lease agreement or due
to a statutory breach of the tenancy.
notice to vacate 329
A written document used by a tenant or a landlord to terminate a periodic tenancy.
354 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
O
obsolescence 52, 56, 226, 265
Loss in value due to reduced desirability and usefulness of a structure because its design and
construction become obsolete; loss because of becoming old-fashioned and not in keeping with
modern needs, with consequent loss of income. The obsolescence may be functional or economic.
office manager 143
A licensee hired by a broker to fulfill their supervisory responsibility of reviewing documents and
maintaining office files.
open listing 126, 129, 136, 287
An employment entered into by a broker to render real estate services on a best-efforts basis under
which a fee is due to the broker if they achieve the client’s objective of the employment before the
client or another broker separately first meet the objective, such as the sale or locating of a property.
open-ended mortgage 77
A mortgage containing a clause permitting the mortgagor to borrow additional money after the
loan has been reduced without rewriting the mortgage.
operating expenses 53
The total annual costs incurred to maintain and operate a property for one year.
opportunity cost 329
The cost of an action that is forgone when choosing to take an alternative action, usually a
consideration when making one investment over another.
option 131, 137, 144, 287, 295
A right given for a consideration to another by a property owner, to purchase or lease a property as
agreed within a specified time without obligating the person who receives the right to exercise the
right.
option listing 129
A variation of the exclusive right-to-sell listing in which the seller grants the broker an option to
buy the property at a predetermined price, if the property does not sell during the listing period.
option to buy/purchase 106, 131, 282
An agreement granting an irrevocable right to buy property within a specific time period.
option to extend 326
An agreement granting a tenant the right to extend possession under their lease agreement on
terms set out in the option to extend.
Real estate glossary 355
P
panic selling 102, 113, 268
As with blockbusting, the prohibited discriminatory practice of a real estate licensee inducing
a property owner to list a property for sale by suggesting that a change in neighborhood
demographics will cause a loss in property values.
par interest rate 322
The interest rate for a mortgage in the secondary mortgage market without the addition of a yield
spread premium or discount points.
parcel 180, 202, 253
A three-dimensional space of real estate identified by a legal description.
parol evidence 327
A rule that prevents a party to a written contract from presenting outside evidence that clarifies the
written terms of a contract that appears to be whole.
parties (party) 21, 66, 126, 145, 180
Those persons taking part in a transaction as principals, e.g., seller, buyer, or lender in a real estate
transaction.
partition 324
A division of real or personal property or the proceeds therefrom among co-owners.
party wall 323
A common boundary improvement located on a property line between adjacent properties, such as
a fence or building wall co-owned by the adjacent property owners.
passive income 323
Profits and losses from rental real estate, operations and sales, and from non-owner-operated
businesses designated for income tax reporting purposes.
patent 322
Conveyance of title to government land.
356 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
proration 87, 90
Provisions entitling the seller to a credit for the portion of prepaid sums which have not accrued on
obligations a buyer assumes on the day escrow closes, or entitling the buyer to a credit for amounts
assumed which accrued unpaid through the day prior to the close of escrow.
protected group 43, 101
A class of people who receive special protections against discrimination due to their distinguishing
factors.
public housing 328
Subsidized housing typically reserved for low-income families, the elderly, and persons with
disabilities.
public policy 101, 111
Laws maintained by local, state or federal government for the conduct of its people.
puffing 102, 117
An exaggeration of a property feature or benefit which, if reasonably believed to be fact, can rise to
misrepresentation and fraud.
purchase agreement 37, 118, 130, 181, 256
The primary document used as a checklist to negotiate a real estate sales transaction between a
buyer and seller.
purchase-money mortgage 329
Nonrecourse mortgage financing provided by a lender as purchase-assist funding for the purchase
of a one-to-four unit residential property the buyer is going to occupy, or a seller carryback note and
trust deed as an extension of credit to a buyer of any type of real estate which is secured solely by
the property sold. Anti-deficiency mortgage.
purchasing power 54, 64, 285
A homebuyer’s ability to purchase property funded by a purchase-assist mortgage based on 31% of
their gross income for mortgage payments at current interest rates.
put option 330
The provision in all trust deeds which, in tandem with anti-deficiency laws, grants an owner-
occupant of a one-to-four unit residential property under a purchase-assist mortgage the right
to default and force the lender to buy the property through foreclosure for the remaining loan
amount.
Q
qualified endorsement 134
The payee’s signature on the back of a check with the words for deposit only.
qualified residential mortgage 329
A home loan which meets low-risk criteria, exempting it from the originating lender’s ownership
of 5% under the risk retention rule. QRMs are expected to meet ability-to-repay requirements,
including the maximum debt-to-income ratio of 43%.
quantitative easing 330
The purchase of government mortgage backed bonds by the Federal Reserve to drive down interest
rates and increase liquidity.
Real estate glossary 359
R
radon gas 322
A naturally occurring gas which accumulates in confined areas at ground level and poses a health
risk to occupants.
ratification 35, 293
The adoption or approval of an act performed on behalf of a person without previous authorization,
such as the approval by a principal of previously unauthorized acts of an agent, after the acts have
been performed.
ready, willing and able buyer 119, 134
One who is prepared to enter into a purchase agreement, wants to buy, and meets the financing
requirements for purchase.
real estate 18, 25, 134, 180, 201
Land and anything permanently affixed or appurtenant to it.
real estate investment trust 131
A security traded on the stock market made up of investments in income generating property, trust
deeds and government securities.
Real Estate Law 34, 39, 112, 117, 176
A collection of 29 codes in California civil law governing real estate practice licensed under the
Business and Professions Code and in the Government Code.
real estate owned property 109
Property acquired by a mortgage lender through foreclosure.
Real Estate Recovery Fund 35, 105, 266
Funds available to individuals who have obtained a final-court judgment against a licensee and
are unable to recover the judgment from the licensee. Also known as the Consumer Recovery
Account.
Real Estate Settlement Procedures Act (RESPA) 68, 75, 284, 294, 297
Legislation prohibiting brokers from giving or accepting referral fees if the broker or their agent is
already acting as a transaction agent in the sale of a one-to-four unit residential property which is
being funded by a purchase-assist, federally-related consumer mortgage.
real estate syndicate 323
An organization of investors usually in the form of a limited liability company who have joined
together for the purpose of pooling capital for the acquisition of real property interests.
360 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
reinstatement 71, 74
A property owner or junior lienholder’s right to reinstate a mortgage and cure any default prior to
five business days before the trustee’s sale by paying the delinquent amounts due on the note and
trust deed, plus foreclosure charges.
rejection 130, 133
When a person chooses not to accept the terms of an offer.
release clause 75
Upon the payment of a specific sum of money to the holder of a blanket mortgage, the mortgage
lien on a specifically described parcel is reconveyed, leaving the mortgage as a lien on the
remainder of the secured parcels.
reliction 24, 281
The gradual recession of water leaving land permanently uncovered.
rent control 328
Local ordinances that are reasonably related to the prevention of excessive rents and maintaining
the availability of existing housing.
rent skimming 323
When a speculator purchases a single family residence (SFR), and collects and keeps rent without
making payments on the underlying loan.
renunciation 38
When an individual who has been granted something or has accepted something later gives it up
or rejects it, as occurs when an agent withdraws from an agency relationship.
replacement cost 55, 58, 173, 259, 263
The cost to replace a structure with one having utility equivalent to that being appraised, but
constructed with modern materials and according to current standards, design and layout.
rescission 138, 234
The cancellation of a contract and restoration of the parties to the same position they held before
the contract was entered into.
restoration 328
The return of funds and documents on a rescission of a purchase agreement sufficient to place all
the parties in the position they held before entering into the agreement.
return on investment 59
A measure of annual income or profits on a sale in relation to capital invested.
reversion 20
The interest which a person has in land or other property which is received on termination of the
preceding estate.
reversionary interest 328
A future interest a person retains on the grant of property which reverts to the person on the
occurrence of an event.
revocation 130, 138
When the person making an offer withdraws their offer prior to delivery of the signed acceptance.
362 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
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sale and leaseback 78, 256
A financial arrangement allowing an owner of a property they occupy to sell the property
and retain occupancy by agreeing to lease the property from the buyer as part of the purchase
agreement negotiated. The seller receives cash while the buyer is assured a tenant and a fixed
return on their investment.
seasoned loan 78
A loan on which the borrower has consistently made payments when due for an extended period
of time.
secondary mortgage market 68, 70, 74, 75, 266
A market for the sale of bonds collaterally secured by a pool of mortgages.
section 22, 25, 149, 153, 253
A portion of land established by government survey which contains 640 acres and is one mile
square.
Section 8 housing 325
A government housing program for low-income households which provides qualifying tenants
with rent subsidies and minimum habitability standards.
security 65, 72, 172
Collateral for a loan in the form of a mortgage lien imposed on property.
security deposit 22, 107, 116, 255
A source of funds to pay tenant obligations owed the landlord on the tenant’s default in the rental
or lease agreement.
seller financing 65, 75, 236
A note and trust deed executed by a buyer of real estate in favor of the seller for the unpaid portion
of the sales price on closing. Also known as an installment sale, credit sale or carryback financing.
senior citizen housing 292
Housing intended for persons 55 or 62 years of age or older.
servient tenement 20, 212, 294
An owner’s property whose title is burdened by an easement which limits the owner’s use of the
portion of the property subject to the easement.
Real estate glossary 363
severalty 89, 91
Ownership by one person.
shared appreciation mortgage (SAM) 78
A type of split-rate note calling for the property owner to periodically pay interim interest at a fixed
rate, and when the balance is due, to further pay the holder of the note as additional interest an
agreed fraction of the property’s increased value.
sheriff’s sale 70, 94
A public auction of property held by the sheriff pursuant to a court order to seize and sell the
property to satisfy a money judgment.
short sale 78
A sale of encumbered property in which the mortgage lender accepts the net proceeds at closing in
full satisfaction of a greater amount of mortgage debt.
single agency 41, 253
The buyer’s agent who is paid their fee on a transaction by their buyer client, and does not fee split
or otherwise share in the fee received by the seller’s broker.
single family residence (SFR) 52, 55, 204, 254, 296
A housing structure, attached or detached, maintained and used as a single dwelling unit.
site valuation 55
The appraised valuation of the ground (site) separate from any structure (improvement) that may
be on the site.
slander of title 327
False and malicious statements disparaging an owner’s title to property and resulting in money
losses to the owner.
solar easement 29
An easement restricting an owner’s ability to maintain improvements, such as trees, interfering wit
h a neighbor’s solar energy system.
special assessment 185
A lien against real estate by a public authority to pay the cost of public improvements such as street
lights, sidewalks, street improvements. In a common interest subdivision, an additional charge
levied by the association for unanticipated repairs.
specific performance 139
A judicial action to compel another to perform an agreement, e.g., sale of land as an alternative to
money losses or rescission.
speculator 145
A real estate investor who owns property short-term, sandwiching themselves between the seller
and end user of the property.
State Water Resources Control Board 327
California government agency authorized to ensure the proper allocation and efficient use of state
water resources.
statement of deficiencies 325
A document a residential landlord presents to a vacating tenant specifying any repairs or cleaning
to be completed by the tenant to avoid deductions from their security deposit.
364 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
T
tax deductions 93
Expenses related to real estate ownership that may be deducted from income for purposes of
income tax reporting.
tax foreclosure sale 93
The sale of a property by the County Tax Collector to pay unpaid property taxes.
teaser rate 322
A temporary, low introductory interest rate found in adjustable rate mortgages.
tenancy in common 89, 90
Co-ownership of property by two or more persons who each hold an undivided interest, without
right of survivorship; interests held need not be equal.
tenancy-at-sufferance 21
A leasehold interest held by a tenant who retains possession of the rented premises after their right
of possession has been terminated.
tenancy-at-will 21, 295
A leasehold interest granted to a tenant, with no fixed duration or rent owed, which may be
terminated at any time by an advance notice from either party.
tenant 21, 29, 144, 146, 261, 264
The party who has legal possession and use of real property belonging to another.
tenant improvements 328
Improvements made to a leased property to meet the needs of the occupying tenant.
tender 139
To make an offer.
tenement 20, 212, 232
A freehold interest in land and things immovable located on the land.
termination 90, 130, 133, 270
The cancellation of a transaction before escrow has closed or a lease has ended.
time-essence provision 138
A purchase agreement provision declaring that dates for performance of any activity or occurrence
of an event are to be strictly enforced as essential to the continuation of the transaction.
366 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
U
U.S. Department of Veterans Affairs (VA) mortgage guarantee 68, 169, 267
A program that assists qualified veterans or their surviving spouses to finance their purchase of a
home with zero down payment.
unearned incremental increase 286, 289
An increase in the value of the property due to outside influences separate from any action by the
property owner.
unenforceable 127, 133, 139, 180
A contract that cannot be enforced in court of law.
Uniform Residential Loan Application ` 325
A standardized mortgage application completed by the buyer with the assistance of the transaction
agent and the mortgage lender’s representative.
unlawful detainer 117
The act of retaining possession of property without legal right. A holdover tenant and a tenancy at
sufferance, the rental or lease term having expired or been terminated and the tenant remains in
possession without the landlords consent.
unlicensed activities 112, 118
Activities performed by unlicensed assistants, such as clerical work which does not relate to the
communication of information such as price and terms of a sale with potential buyers and sellers.
Unruh Civil Rights Act 102
A California law which prohibits discrimination by a business establishment based on sex, race,
color, religion, ancestry, national origin, disability or medical condition. A real estate practice is a
business establishment.
use-maintenance provision 322
A provision in a commercial lease agreement which establishes the landlord’s and tenant’s
responsibility for the care and maintenance of the premises during the lease term.
usury 69, 77
A limit on the lender’s interest rate yield on nonexempt real estate loans.
utilities 53, 256
Refers to services rendered by public utility companies, such as - water, gas, electricity, telephone,
cable, internet.
368 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
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vacancy rate 54
The percentage of a building’s space that is not rented over a given period.
value 50, 54, 110, 152
The present worth stated in dollars of the future benefits arising out of the ownership of a property.
vendee 134, 145, 205
A buyer under a land sales contract.
vendor 135, 145, 229
A seller under a land sales contract.
vesting 89
A method of holding title to real estate, including joint tenancy, tenancy in common, community
property and community property with the right of survivorship.
void 127, 137, 230, 256
To have no force or effect; that which is unenforceable.
voidable contract 127, 133, 200, 255
That which is capable of being adjudged void, but is not void unless action is taken to make it so.
voluntary lien 65
Any lien placed on property with consent of, or as a result of, the voluntary act of the owner.
W
waive 324
To relinquish, or abandon; to forego a right to enforce or require something.
warehousing 70, 75
Mortgages held by loan brokers until they are bundled with other mortgages and sold on the
secondary mortgage markets.
warranty deed 112
A deed used to convey real property which contains warranties of title and quiet possession, and
the grantor thus agrees to defend the premises against the lawful claims of third persons. It is
commonly used in many states but in others the grant deed has supplanted it due to the modern
practice of securing title insurance policies which have reduced the importance of express and
implied warranty in deeds.
waste 322
The intentional destruction or neglect of property which diminishes its value.
wear and tear 325
Depreciation of an asset due to ordinary usage.
wild document 221
A document outside of the chain of title, such as one created through forgery.
yield 65, 210
The interest earned by an investor on an investment (or by a bank on the money it has loaned).
Also, called return.
Real estate glossary 369
Z
zoning 23, 26, 286, 293
Building and land use restrictions enacted by local policy makers to ensure a consistent flow of
new improvements to meet the demand of population growth.