Real Property Ownership

STUDY SHEET

Top Takeaways
Real Property vs. Personal Property

Real property-The land and everything attached to the land

Example: built-in hot tub
Personal property-Everything not attached
Example: free-standing hot tub

Tests of a Fixture (MARIA)

M ethod of annexation
A daptability of item to land's use
R elationship of the parties
I ntention in placing item on land
A greement of the parties

Forms of Legal Description

Metes and bounds

Lot and block
Rectangular survey

Real Property Ownership Rights

Possession
Enjoyment
Exclusion
Control
Disposition

More Rights in the Bundle

Mineral rights
Air rights
Water rights
Littoral
Riparian

Appurtenances

Profit
License

Measuring Square Footage

Only finished areas attached to the main property

No garages
Ceiling height at least seven feet (with some exceptions)

Land Measurement Conversions

One foot = 12 inches

One yard = 3 feet
One mile = 5,280 feet
One square yard = Nine square feet
One acre = 43,560 square feet
One section = one square mile (5,280 feet on each side; 640 acres)
One cubic yard = 27 cubic feet

Freehold vs. Leasehold Estates

Freehold Estates are ownership estates of interdeterminable length.

These include:

Fee simple estate

Life estate

Leasehold Estates are the rights of possession without ownership. They include:

Estate for years

Estate at will
Estate at sufferance
Periodic estate

Forms of Ownership

Severalty

Title is held by one owner.

Co-Ownership

Title is held by two or more persons or two or more legal entities.

Tenancy in common
Joint tenancy
Tenancy by the entirety

Trust

Title is held by a third person for the benefit of another (or others), called the beneficiary (or beneficiaries).

Real Estate Investment Trust (REIT)

Living
Testamentary
Land

Business Ownership

Limited liability partnership (LLP)

Limited liability company (LLC)
Sole proprietorship
Partnerships
Corporation

Encumbrances

An encumbrance is anything that limits or prevents the transfer of title to a property. Encumbrances can be monetary or
physical. Liens, easements, encroachments, licenses, and existing leases.
A lien is a debt against a property that must be paid off in order for a title to be transferred. Liens can be voluntary or
involuntary, and when there are multiple liens on a property, certain liens have priority over others.
An easement is an authorized physical restriction on the use of property. There are two main classifications of easements:
easement appurtenant and easement in gross. Easements are created for Right-Of-Way (ROW), driveway, drainage, solar,
light and air, utility, and conservation.
Easements remain attached to a property permanently, unless both parties agree to remove them. They can be terminated
through express agreement, abandonment, merger, and lack of necessity.
An encroachment is an unauthorized affixed intrusion into another's property.
An existing lease is an encumbrance because, unless the lease states otherwise, tenants usually have the right to remain in
a property even if it's sold during their lease term. New owners have to honor the existing lease terms.

Common Interest Property Type

Co-Ops

Shareholders don't own any real estate, just shares in the corporation.

Townhomes

The owner owns both the structure and the land.

Condos

The owner owns a unit within the structure, but no land.

Timeshares

Ownership of property allows purchaser to use for periods through the year.

Definitions

Accession -The increase of land or property due to natural or man-made causes

Accretion -Process in which water carries rock, sand, and soil and causes land build-up

Alluvion -The new deposits of land that are the result of accretion (common at the mouth of large rivers)

Avulsion -Rapid loss of land

Common area -Shared halls, bathrooms, lobby, service closets, elevators, stairwells, etc.

Easement appurtenant -An easement attached to a specific parcel of land that transfers with the land and grants the right to use
adjoining property

Easement in gross -An easement granted to a specific individual or business entity rather than attached the property itself

Erosion -Gradual loss of land due to natural force

Estate in severalty -One person owns the property; all other interests are severed.

Improvements -Artificial attachments, such as fencing, buildings, and walkways

Joint tenancy -Equal ownership with undivided rights of possession in which each owner may sell his own interest; if one owner
dies, that person's ownership reverts to the survivors.

Land -Earth's surface extending downward to the center of the earth and upward to infinity, including permanently attached
natural objects

Land trust -A trust consisting of real property only

Livable square footage -Square footage that includes enclosed areas that are suitable for year-round use, containing
walls, floors, and a ceiling, and accessible from the rest of the living area.

Living trust -A trust created during an individual's lifetime

Metes and bounds -Uses compass heading and directions

Monument system -Permanent land markers are used as point of beginning

Lot and block -Provides plat references

PUD -Planned Unit Development

Real estate -Everything in the definition of land, plus all things permanently attached to it naturally or artificially

Real property -Real estate plus the interests, benefits and rights automatically included with real estate ownership

Real Estate Investment Trust (REIT) -Companies that own income-producing real estate

Rectangular (government) survey system -Divides land surveyed into six-mile-square townships, which are further subdivided

Reliction -Increase in land caused by the permanent recession of water (such as lake)

Rentable square footage -Usable square footage plus a tenant's share of common areas

Tenancy in common -Each person is entitled to possession of the whole, and if one dies, that person's ownership is inheritable
(but doesn't necessarily pass to the other owners).

Tenancy by the entirety -Spouses own property together as a single legal entity and neither spouse may sell or give away an
interest in the property without the other's permission; if one dies, the entire ownership reverts to the surviving spouse.
Testamentary trust -A trust created per the will of a deceased person

Usable square footage -Square footage that can be used by a tenant

Land Use Controls And Restrictions
STUDY SHEET

Land Use
Private Land Use Controls

Deed restrictions

Subdivision regulations

CC&Rs

Conditions-Contingencies under which a property might be won or lost if the condition is violated

Covenants-Agreements between two or more parties

Deed restrictions-Limits property use or appearance

Public Land Use Controls

Police power

Building code regulations and building permits

Escheat

Eminent domain

Taking

Taxation

Zoning

Zoning Classifications

Agricultural

Commercial

Industrial

Institutional

Parklands

Open space

Recreation area

Residential

Vacant land (unimproved)

Zoning Ordinances

Incentive zoning

Bulk zoning

Aesthetic zoning

Downzoning

Zoning Actions and Variances

 Moratorium - Halts new building temporarily

Variances

Use variance-Allows owner to use land for a purpose otherwise be prohibited by zoning law

Area variance-Allows owner to use land in a way not supported by the physical or dimensional requirements of
zoning law

Special use permits-Require a public hearing

The Sunshine Law

The Freedom of Information Act requires public access for all meetings of governmental agencies and their departments.

Special Property Types

Wetlands

Floodplains

Waterfront property

Coastal zone

Rivers and harbors

Environmental Issues
Environmental Acts

CERCLA

SARA

RCRA

CWA

CAA

TSCA

Environmental Hazards

Inside the home

Asbestos

Mold

Radon

More hazards

CO

PCBs

CFCs

Formaldehyde

Underground storage tanks

Waste disposal sites

Brownfields
Estimating Value
STUDY SHEET

Purpose of an Appraisal
Evaluation: A study of a property, possibly for land use or marketability.
Valuation: The process of forming an opinion of a property's value.
Appraisal: Determines property value based on the appraisal "problem," which varies depending on the property type,
client, and intended purpose of the appraisal.
Lenders or buyers typically hire appraisers.
Appraisers determine property worth, and real estate licensees prepare a comparative market analysis for what buyers in a
given market will pay for the property.
Appraisals help determine mortgage value, investment value, or insured value.

Price Value and Cost

Price: Amount the buyer paid for a property and what the seller has accepted.
Value: A property's worth that may not equal price or cost.
Cost: Amount to recreate that property if it disappeared off the face of the earth today.

DUST
Four factors of value - D emand, U tility, S carcity, and T ransferability.

Principles of Value
The principle of conformity: A property's value is determined in part by how well it conforms to its surrounding area.
The principle of competition: A property's value is determined in part based on what else is available.
The principle of substitution: A reasonable person will not pay more for a property if a comparable one can be had for
less.
The principle of contribution: The value of any given change to the property is dependent on the value of the property
as a whole.
Highest and best: The most profitable (and legal and possible) use of a property.
Plottage: The joining of two adjacent parcels to increase the overall property value beyond what each would be worth if
sold separately.
Regression: A decline in value due to the decline in value of neighboring properties.
Progression: The increase in property value from increased surrounding property values.

The Sales Comparison Approach to Value

This approach is based on the value of similar properties in the market.
Appraisers using this approach will look at both qualitative (elemental) and quantitative (unit-based) assets of a property.
Appraisers will consider elements in a specific order: financing terms and cash equivalency, conditions of sale, market
conditions at the time of contract and closing, location, and physical characteristics.

The Cost Approach to Value

This approach is based on the cost to rebuild the property.
It is weighted heavily when the property is unique, e.g. a movie theater, hospital, or winery. Used frequently in newly
constructed or high value unique homes.
External depreciation is caused by factors outside the property (e.g., an airport is built nearby, causing noise).
Functional obsolescence occurs with outdated structure or systems, or when a property is overbuilt for the area.
Physical deterioration occurs with wear and tear, damage, and improper maintenance.
The replacement cost approach bases value on cost to build a functionally equivalent property.
The reproduction cost approach determines cost to build an exact replica of the property with the same materials and
deficiencies.
The site value approach assumes the land is vacant and bases opinion on highest and best use.

The Income Approach

This approach determines potential property income if leased or rented, or by other means.
Gross income multiplier: Sales price divided by gross annual income.
Gross rent multiplier: Sales price divided by the gross monthly rent.
Capitalization rate or cap rate: An annual rate of return from an income-producing property. Often used by investors to
determine value or to compare one investment to another.
 Determine cap rate: Divide annual income by value (or sales price) (I ÷ V = R).
Determine value using the cap rate formula: Divide annual income by cap rate (I ÷ R = V).
Determine income using the cap rate formula: Multiply cap rate by value (R x V = I).
To calculate the value of a house by the income approach, if you know the GRM (gross rent multiplier) of comparables is
79x, multiply the monthly annual income of the property by 79.

Reconciliation
Not taking the average of the suggested values. Analyzing the findings from the approaches used, and then weighing the
findings that each provided.

How Market Conditions and Seller Motivation Impact Value

Higher unemployment reduces the number of buyers, putting downward pressure on housing prices.
Higher taxes decrease buying power; lower taxes increase buying power.
Higher interest rates reduce buyer affordability. Lower interest rates increase buyer affordability.

CMA vs. BPO vs. Appraisal

CMAs are not appraisals and are usually prepared at no cost.
BPOs are usually prepared for a minimum fee, and appraisals generally cost $400 and up.
BPOs and CMAs are prepared by real estate licensees; only certified appraisers may prepare appraisals.
A BPO is sometimes ordered by a lender in a foreclosure situation in order to determine approximate market price.

Pricing Properties
When making CMA adjustments, adjustments are made to the comparables, not to the subject property.

When selecting CMA comparables, recent sales carry more weight than older sales.

Calculating Price Per Square Foot

To find a home's estimated value (based on price per square foot), multiply the number of square feet by the price per
square foot.
Price per square foot is calculated by dividing a home's price by its square footage.

Definitions
Appraisal: An estimate of value that's for a specific purpose, party, and property as of a specific date.
Broker's price opinion (BPO): The process used by a hired sales agent to determine the potential selling price or
estimated value of a real estate property.
Comparative market analysis (CMA): An opinion of a property's market price range.
Market value: The price the buyer and seller agree upon.
Demand: How popular or desirable a property is.
Utility: The function of the property.
Scarcity: Relates to market supply.
Transferability: The ease with which another person can purchase the property.
Real Estate Financing Basics
STUDY SHEET

Types of Mortgage Lenders

Commercial banks: National banks that offer consumer and business loans
Savings and loan associations: Take savings deposits and make loans
Credit unions: Member-based cooperatives that take deposits, offer savings vehicles, and provide credit for auto and
home loans
Mortgage brokers: Match consumers with lenders; don't fund loans
Mortgage bankers: Make loans using in-house loan processors and underwriters
Investment groups: Lend to investors who want to avoid conventional financing

Fannie Mae and Freddie Mac

Government sponsored enterprises (GSEs)
Corporations, traded on major stock market exchanges (FNMA and FMCC)
Act as a link between banks, the government, and Wall Street

Conventional Loans
Conforming: Loans that meet Fannie /Freddie guidelines

Government Loans
Federal Housing Administration (FHA) insured
U.S. Department of Veterans Affairs (VA) guaranteed
U.S. Department of Agriculture (USDA): Some state and local programs

The Secondary Mortgage Market

Frees up primary mortgage market funds so lenders can make more loans
Key players: Fannie Mae, Ginnie Mae, Freddie Mac, and Farmer Mac
MBSs: Pools of mortgages sold to investors
Groups loans into MBSs and sells shares to investors

Common Financing Methods (Types of Loans)

Multiple types of loans and loan sources: Residential, short-term, refinancing and equity related, owner financing, and
commercial
Balloon loan: Paid as an interest-only or partially amortized loan with a lump-sum payment, usually at the end of the loan
term
Amortized loan: Paid in regular installments of principal and interest
Adjustable-rate mortgages (ARMs): Interest rate fluctuates based on the economic index
Fixed-rate loan: Principal and interest remain the same through the life of the loan
Bridge or swing loan: Temporary (usually 90-day), provides funds until permanent financing can be obtained
Home equity loan: From the equity of a home; can be first mortgage (if home is fully owned) or second mortgage
Budget mortgage (PITI): Typical amortized mortgage loan including principal, interest, taxes, and insurance in each
(usually monthly) payment
Term or straight-term: Borrower only pays interest for a set term then pays off the loan in a lump sum or through
another loan

Rural Development Loans

Loans for family farms and rural housing
Administered by the Farm Service Agency
Can be up to 100% of the purchase price and set for 33 years (38 for very low-income borrowers)

Mortgages
Gives mortgagees the right to foreclose on property in case of default
Lien theory states: Borrower has both equitable and legal title
Title theory states: Lender holds title in borrower's name and has legal title; borrower has equitable title
Foreclosure: In title states, usually non-judicial; in lien states, judicial methods
 Judicial foreclosure: Process in which a home is sold to pay off an unpaid debt
Non-judicial foreclosure: Process in which a trustee has the power to sell a home to pay off an unpaid debt

Promissory Notes
Note: A promise the borrower makes to repay a certain sum of money to the lender or note holder under specified terms
Promissory notes: Should include date, principal, interest rate, discount points, loan term, fees involved, pre-payment
penalties, default circumstances, and process
A negotiable instrument: Holder may transfer the right to receive payments to a third party, which may enforce the
promissory note
Pre-payment penalty: A charge to the borrower for the early repayment of a loan
Discount points: Upfront charges to make up for difference between the borrowing rate and the rate the lender normally
requires
Interest: Charge for the use of money

Mortgage Clauses
Defeasance clause: Discharges the lien when the mortgage is paid in full
Acceleration clause: Makes the entire debt due immediately if there's borrower default
Due on sale clause: Borrower must repay loan when transferring ownership to another
Pre-payment penalty clause: An amount the lender charges for interest lost when a borrower sells or pays off a loan
early
Mortgagee rights: Foreclose on property if mortgagor defaults, possess property (after foreclosure) if mortgagee is
purchaser at sale, assign the mortgage
Mortgagor rights: Possess property during mortgage term; receipt of title and release of lien upon paying mortgage in full
Mortgagor duties: Pay the debt and real estate taxes, maintain adequate insurance, keep property in good repair

Prepayment Penalties
Imposed on a borrower for paying off a loan early because the lender will receive less money (in interest) than was
intended per the terms of the loan
Must be disclosed up front to borrower, including information that other available loans don't have prepayment penalties
Bi-weekly plan: Pay half the mortgage payment every two weeks instead of once per month
1/12 plan: Divide the mortgage amount by 12 and add this additional amount to the monthly payment
Lump sum plan: Put a portion of any bonuses, tax returns, or extra money toward the mortgage
Set dollar over: Pay a specific additional amount with each mortgage payment
Snowball: When another bill is paid off, add that amount to the mortgage payment

The Residential Loan Process

Pre-qualification or pre-approval, loan application, loan processing, underwriting, and an approval/denial decision
Loan pre-approval or pre-qualification can improve the chance of offer acceptance
Loan pre-qualification: Buyer reports income, assets, debt, and available down payment to the lender and receives a pre-
qualification letter that estimates a loan amount, without verification; usually no cost
Loan pre-approval: Buyer applies for a loan with a lender, documenting income, assets, debt, and down payment; lender
verifies and determines buyer's ability to finance
Loan application: Buyer completes and submits to the lender with supporting documentation
Loan processing: Lender collects documentation about borrower's income and credit, as well as the property

Underwriting: Underwriter analyzes borrower's completed loan package and recommends loan approval or denial

Lender Criteria
Lenders want solid credit in a buyer and solid value in a property
Credit risk and income: Lenders analyze borrower's income, tax returns, W-2s, pay stubs, and bank statements
Debt ratio calculations: Monthly housing expense to income and total payment obligations to income.
Employment history: A big consideration; steady, salaried income preferred
Loan-to-value ratio (LTVR) calculation: Determines a property's investment quality; based on the lesser of the sales
price or appraisal
Inflationary periods: Fewer buyers and higher interest rates

Loan Points: Origination Fees, Discount Points, and Buydowns

Loan points: Percentage of the loan value; one point equals 1% of borrower's loan amount
Loan origination fees: Compensates lenders for making the loan; expressed as points; can't be more than 3% of a loan
value; nearly always negotiable
Discount points: Used to reduce a loan's interest rate; aka buydowns
Buydown: Interest pre-payment at closing to reduce interest rate either temporarily or permanently
 Example of calculating discount points: One point = 1% of the loan amount; so if a lender charges two points on a
$250,000 loan, it would be $250,000 x .02 = $5,000
A 3-2-1 buydown: 3% interest rate reduction year one, 2% year two, and 1% year three; interest rate returns in full year
four

Down Payment Assistance Programs

Both buyer and home must meet eligibility requirements, which may vary by program
Mortgage credit certificates: Issued to qualified buyers by state and local governments; buyers may claim some of the
mortgage interest they paid as a tax return credit
Second mortgage grants and deferred loans: Zero- or low-interest loans sometimes called "silent seconds"; borrowers
repay when they sell the home, refinance, or pay off the first mortgage, or otherwise vacate the home
Home grant (or "gift"): Money that doesn't have to be paid back as long as the buyer meets requirements, such as owning
and living in the home for a specific length of time
Low down payments: Many mortgage lenders require as little as 3% down

PITI
Property taxes: Cost of public services divided by the value of property for the area
Interest: Fee paid back to the lender for the use of its money; generally decreases over the life of the mortgage
Principal: Loan amount owed; as interest portion decreases, principal portion increases
Insurance: May include mortgage, homeowners, and/or flood insurance

PMI and MIP

PMI: Applies to conventional loans when borrowers put less than 20% down and the loan-to-value ratio exceeds 80%
PMI purpose: To protect the lender in case of borrower default when less than 20% has been put down
PMI termination: Lenders terminate when the LTV reaches 78%
MIP: Applies to all FHA loans and is paid for the entire life of the loan; paid as an upfront charge at closing then as an
annual premium until the loan is paid off or refinanced
VA loans: Don't require down payments or mortgage insurance

Mortgage Fraud
Methods include: False documents, identity theft, straw buyers, and real estate or other professional fraud
Most common mortgage schemes: Illegal property flipping, inflated appraisals, silent second, nominee loans/straw
buyers, equity skimming, and false identity
Illegal property flipping: Property falsely appraised at a higher value, then quickly sold
Straw buyers: Conceal their real identity behind someone else's name and credit
Inflated appraisals: An appraiser secretly works with a borrower and provides a misleading appraisal report to the lender
Red flags: Buyers with very limited credit history, missing or inconsistent information in the sales agreement, significant
sales price adjustments not supported by market data, drastic increase of income, or unrealistic borrower income

Predatory Lending Practices

Take advantage of consumers, encourage debt, don't consider affordability, encourage multiple refinancing, and hide fees
from borrowers
Often found in the subprime loan market

Usury Laws
Usury: Lending money at an excessive rate
Laws designed to protect consumers from exorbitant fees and interest rates by limiting what lenders charge to reasonable
amounts
Each state dictates the interest amount before it is considered usurious or unlawful.

The Truth in Lending Act (TILA)

Regulation Z: Mortgage lenders must follow TILA disclosure requirements for real estate advertisements including
credit terms
TILA: Requires lenders to make full disclosure of terms and conditions in any offers of credit when advertising trigger
loan terms, so as not to mislead consumers
"Trigger" terms in ads that would require the full disclosure of all terms: Down payment, payment amount, number
of payments, and interest rate (other than APR)

The Real Estate Settlement Procedures Act

RESPA: A consumer protection statute to help homebuyers in the homebuying process
 Requires disclosures to help to make settlement costs clear and fair to consumers
Prohibits kickbacks and referral fees among settlement service providers
Requirements apply to financed home purchases, most loan assumptions, refinances, home improvement loans, and home
equity lines of credit (HELOCs) on one- to four-unit residential properties
Licensees' RESPA responsibility: Avoid accepting fees or gifts from settlement service providers they may refer

ECOA, HMDA, and CRA

Federal legislation that requires lenders to base lending decisions on a borrower's creditworthiness, not protected class
status, and to invest in their communities through financing rehabilitation programs and providing mortgage loans
Designed to prohibit discriminatory lending practices
CRA: Created in response to redlining; requires lenders to invest in development and rehabilitation efforts, to enable low-
moderate income individuals and families to afford a home
ECOA: Prohibits lenders from making credit unavailable or offering less-favorable terms based on protected class status
vs. creditworthiness
The HMDA of 1975: Requires financial institutions to report and publicly disclose mortgage information to help pubic
officials determine if community housing needs are being met

Definitions
MBSs: Mortgage-backed securities
GSEs: Government Sponsored Enterprises
Mortgagee/mortgagor: Lender/borrower
Mortgage: A legally binding document that is a lien against a property.
LTVR: Loan-to-value ratio
PITI: Principal, interest, taxes, and insurance
PMI: Private mortgage insurance
MIP: Mortgage insurance premium
TILA: Truth in Lending Act
RESPA: Real Estate Settlement Procedures Act
MCCs: Mortgage credit certificates
CRA: Community Reinvestment Act
ECOA: Equal Credit Opportunity Act
HMDA: Home Mortgage Disclosure Act
Real Estate Agency Basics
STUDY SHEET

Agency Roles
A principal is the party to the transaction who is represented (the client).

A client has representation; a customer doesn't.

A fiduciary is someone in a position of trust who owes loyalty to another.

Non-agents are known as facilitators or transaction brokers, and don't actually represent the customer.

A universal agent has broad authority to act for the principal, such as someone who has power of attorney.

A special agent has limited authority to act on a client's behalf, such as a real estate agent.

A general agent is responsible for handling all dealings in a given area for a client, such as a property manager.

Single agency is the representation of one party, either the buyer or the seller, in a transaction.

Dual agency is the representation of both the buyer and the seller in the same transaction.

In states where dual agency is allowed, both parties must consent to it prior to entering into a representation agreement.

Sub-agency is when an agent from one firm works under a listing agent at a different firm to represent the seller.

Some brokerages allow only single agency. In those brokerages, licensees may not represent opposing sides in a single
transaction.

Fiduciary Duties
As an agent, you owe fiduciary duties to your client.

Fiduciary duties include: obedience, loyalty, disclosure, confidentiality, accounting, and reasonable skill and care (OLD
CAR).

Obedience doesn't mean blindly following a client's instructions if they are not in the client's best interests or if they are
illegal.

Loyalty means putting your client's interests ahead of others, including your own.

As an agent, you must disclose to all parties any adverse material facts about the transaction.

While you must disclose material facts, you must keep confidential any information about your client's motivations.

Accounting means proper handling of client property, which includes keys, funds, paperwork, and the property itself.

The duty of reasonable skill and care requires agents to operate within the scope of their expertise, and advise clients to
seek expert advice on matters that are outside of the agent's expertise.

To parties other than your client, you owe the duty of honesty and fairness to all parties, as well as the duty to disclose all
known material facts and correct all material facts that are known to be in error.

When working as a listing agent, you must cooperate with buyers' agents on showings, offer presentations, and paperwork.

Undivided loyalty is a duty that is impossible under dual agency.

Confidentiality is still required in dual agency.

Creating and Terminating Agency

Express agency is an agency relationship that's understood and agreed to by the parties.

Implied agency is created by the actions of the parties, and it's to be avoided. All agency agreements should be committed
to in writing.
 Ratification is acceptance after the fact, either through signing paperwork or through the parties' actions. Agency can be
ratified.

Estoppel prevents one party from suing another, because the party's actions implied they were in agreement with the other
party.

Agency is created solely through agency agreement-not through compensation. Paying a commission does not create an
agency relationship between the payer and the licensee.

Agency is terminated in the following situations:

Incapacitation of the agent

Incapacitation of the principal

Destruction of the property

Bankruptcy of the agent

Bankruptcy of the principal

Client revocation

Agent renunciation

Agency is also terminated when the client's goals have been met, the term of the agency agreement expires, or there is
mutual dissolution.

Two fiduciary duties survive agency termination: confidentiality and accountability.

Disclosing Agency
A lot of problems can arise when customers and clients aren't clear on everyone's roles during a transaction, so it's
important for all parties to understand who's representing whom.
Real estate licensees are required to disclose their role to consumers.
Because agency disclosure is so important, most states have laws that require licensees to provide state-specific agency
disclosure forms to consumers at first substantial contact. These forms explain the types of agency relationships available,
what duties are owed to them in each situation, and who represents whom in the transaction.
Disclosure of Property Conditions
STUDY SHEET

Types of Property Disclosure States

Relative to property disclosure, states are either full disclosure or caveat emptor.

Many states are full disclosure states, in which the seller must proactively disclose property conditions and known defects.

Caveat emptor means "let the buyer beware." In these states, the seller makes no representations about property
conditions, and the burden is on the buyer to perform due diligence.

In both types of states, the seller must respond honestly to questions about property condition and cannot actively try to
conceal known defects.
Caveat Emptor Property Disclosure Roles

In caveat emptor states, the seller's agent has a responsibility to notify the seller of the following duties: to disclose items
that are required to be disclosed, to be honest, and to not hide defects.

The seller is required to disclose items required by law, and honestly respond to questions about conditions.

The buyer has a responsibility to ask questions, investigate red flags, and obtain a home inspection.

The buyer's agent has a responsibility to counsel the buyer about due diligence and home inspections, and follow up on
red flags.

Full Disclosure Property Disclosure Roles

In full disclosure states, the seller's agent has a responsibility to notify the seller of the duty to disclose all known material
facts.
The seller is required to disclose all items listed on the seller disclosure form and known defects not on the form.
The buyer and buyer's agent responsibilities are the same as in caveat emptor states, with the added tasks of obtaining and
reviewing the property disclosure statement.
Property Condition Disclosure Statement
Sellers complete a property condition disclosure statement to disclose all known property defects.
The statement provides many benefits for the buyer: transparency in the homebuying process, an insider's perspective on
the state of the home, and seller-made improvements that may have otherwise been invisible.
The statement provides many benefits to the seller: protection from liability and legal action after the sale, an easier
selling process with a more confident buyer, and fewer surprises during the home inspection.
If sellers need to correct inaccuracies in the statement, they can either provide an addendum, which adds new information,
or an amendment, which corrects the information.
If a seller hasn't provided proper disclosure prior to closing, buyers can terminate the agreement and ask for a refund of
their earnest money. Or the buyer can ask the seller to make necessary repairs or provide a credit.
If a seller hasn't provided proper disclosure and the deceit is discovered after closing, buyers can sue the seller for breach
of contract or for fraud.

Licensee Responsibilities
A licensee is required to disclose any adverse material information to potential buyers before a sales agreement is made, if
that information hasn't already been disclosed by the seller.

Information that must be disclosed is anything that meets the MAAP standard: material, adverse, actually known, and
related to physical condition.
Home Warranties

Many new construction homes come with home warranties backed by the builder. These may cover workmanship and
materials, as well as systems and structural issues.

Both the FHA and VA require builders to purchase third-party warranties to protect buyers of newly built homes financed
with FHA or VA loans.

For existing homes, buyers and sellers may purchase home warranties.

Disputed home warranty claims typically go through mediation first, followed by mandatory arbitration.
Home Inspection Basics
 Seller disclosures aren't always accurate, and sellers might not be aware of all defects. Home inspections can tell the true
condition of a property.A home inspection contingency is one of the best ways to protect the buyer's earnest money.

Licensees should encourage all buyers to obtain home inspections.

Inspection Issues: Structural

Roof: discolored or curling shingles, water buildup or ice damming in gutters, damage to flashing, water damage along
the fascia, and cracks, holes, or rot on the soffit

Chimney and fireplace: creosote buildup on the exterior of the chimney, drafts near the fireplace, a cracked or sloping
hearth or firebox, and loose or crumbling bricks

Foundation: cracks in basement walls, moisture in the basement, misaligned doors and windows, cracks in drywall, and
separation around garage doors

Window: damaged or broken glass and screens, windows that stick or won't stay open, damaged hardware, and leaking or
damaged seals

Inspection Issues: Systems

Heating and cooling: rooms that are too hot or cold, furnace or a/c that won't turn on when temperature is adjusted, or
pilot light that won't stay lit

Electrical: switches that are warm to the touch, lights that dim when others are in use, burnt or discolored outlets, faulty
appliances, and old or damaged circuit breakers

Plumbing: water damage on ceilings or walls, leaking or blocked drains, clogged or leaking toilets, reduced water
pressure, or soggy ground around the home

Buyers should always inquire about the condition, age, and maintenance of all systems.

Inspection Issues: Exterior Conditions

Standing water for more than 24 hours after heavy rain may indicate drainage problems.

Flood damage can be indicated by wall discoloration, sagging or uneven floors, and a musty odor in the home.

Fire damage may be indicated by discoloration in the attic or around windows or doors.

Missing, cracked, displaced, or otherwise damaged roof components could indicate wind or storm damage.

Inspection Issues: Additions, Encroachments, Easements, and Location Issues

Any obvious additions or alterations deserve
an investigation as to whether permits were obtained.

Unpermitted work could result in partial or full disassembly of the work to inspect it, as well as possible correction or
restoration to the original state.

An on-site survey can help determine easements, encroachments, and lot size.

The property's deed and title history should list known easements. Subdivision maps may also show known easements.

Buyers should inquire about the location of the property and whether it's located in a protected zone, such as a wetland or
an historical district.

Buyers should determine whether a specific property is under a tax abatement or is uninsurable. This can affect
affordability as well as enjoyment and use.
Environmental Hazards

External environmental issues include underground storage tanks, groundwater contamination, and the presence of former
waste disposal sites.

Interior environmental hazards may include radon, asbestos, and mold.

Radon occurs naturally in the environment and can be found in soil and well water. Homeowners can self-test for radon.
 Asbestos was used in many materials before the 1970s. Asbestos becomes dangerous when it begins to deteriorate and
becomes friable. Only licensed professionals should handle asbestos.

Mold growth is promoted by excessive moisture and lack of air circulation.

Standing water for more than 24 hours after heavy rain may indicate drainage problems.

Common wood-eating pests include termites, carpenter ants, and powderpost beetles.

Removing moisture and performing annual inspections are common actions to keep pests at bay.

Only licensed professionals should apply pesticides.

Residential real estate transactions involving properties built before 1978 must provide a lead-based paint disclosure.

Lead can be found in paint, plumbing, dust, soil, and drinking water.

Babies, children, and pregnant women are most susceptible to lead exposure.

Stigmatized Property
Stigmatized properties may be locations where a death (either homicide or suicide), crime, or haunting occurred.

Most states do not consider these disclosable issues, but there are a few states that do.

Disclosing that a previous owner or resident had HIV or AIDS is a fair housing violation. This information should never
be disclosed.

Sellers need not disclose the presence of nearby sexual offenders. Buyers can be directed to websites or other resources to
research information made available by Megan's Law.
Contract Law Basics
STUDY SHEET

Contract Essential Elements

The statute of frauds requires that certain types of contracts, such as the transfer of ownership in real property, be in
writing to be legally enforceable and to prevent injury from fraudulent conduct.
Requirements for a valid contract include:
Offer and acceptance
Consideration
Legally competent parties
Legal purpose
Consent
Offer and acceptance occur when the parties enter into an agreement voluntarily with full understanding of contract terms.
Legally competent parties are those who have the legal and mental capacity to enter into a contract.
Legal purpose means that the contract results in a legal outcome.

Types of Contracts
A voidable contract is missing one or more essential elements, or may contain a mistake or misrepresentation.
A void contract isn't a contract at all because of a lack of legal force or effect.
In a bilateral contract , both parties have obligations. In a unilateral contract , only one party makes a promise.
When all of the parties have completed the terms of the contract, the contract is executed .
Contracts are executory during the period when the parties are still negotiating the terms.
A contract clause is a section or provision within a contract that addresses a specific point of law or aspect of the
agreement.
Acceptance occurs when all parties have signed a contract, while binding acceptance happens when the signed contract
is delivered.
When a specific date isn't provided in the contract, performance must take place within a " reasonable time ."

Contract Performance
Contract performance means that the terms of the contract have been met.
Assignment of a contract means to find a substitute for one of the original parties. It requires the consent of the parties,
and the original party may still remain responsible for the terms in the event that the substitute defaults.
Novation is the full substitution of a new party in place of one of the original parties, transferring all rights and
obligations to the new party. The original party is no longer liable.
" Time is of the essence " means that the parties agree to proceed in good faith without delay.
When one party to a contract agrees in writing that the other party is no longer held to one or more of the provisions of the
agreement, this is called release .
A contract is rescinded when both parties agree to cancel the agreement.
Breach of contract occurs when one party fails to meet the obligations of the contract.
When a breach occurs, only the innocent party may unilaterally terminate the contract. The innocent party may also sue
for specific performance, accept partial performance, or pursue damages.
When one party meets some, but not all, of the terms of the contract, that's partial performance .
Agency Agreements
STUDY SHEET

Summary
Agency agreements are agreements that establish an agency relationship between an agent and either a real estate buyer (under a
buyer representation agreement) or seller (under a listing agreement). These agreements must include the definite beginning and
ending dates of the agreement, the agent's compensation details, and the obligations and duties of both parties to the transaction.

Top Takeaways
To protect your compensation, listing agreements should be in writing.
The agreement between the parties, rather than the payment of compensation, determines the agency relationship of the
parties.
Net listings are illegal in many states because of the potential for conflict of interest.

Definitions

Exclusive Right-to-Sell Agreement: Agency agreement in which the listing agent lists the property and receives a
commission, no matter who brings in the buyer.
Exclusive Agency Agreement: Agency agreement in which only one broker lists the property. If that broker or any other
broker sells the property, the listing agent is owed a commission.
Open Listing Agreement: Unilateral agreement in which a seller may contract with many real estate agents to locate a
buyer. Only the agent who brings in the buyer earns the commission.
Exclusive Right to Represent: Most popular form of a buyer representation agreement because it gives the licensee the
sole right to represent the buyer.
Real Estate Contracts
STUDY SHEET

Sales Contracts
Sales contracts, also known as purchase and sales agreements, are agreements between buyers and sellers. These are legally
binding contracts subject to contract laws in the specific jurisdiction. Leases and option contracts are other key types of real estate
contracts.

The sales contract, once it's signed by the parties, is a legally binding document describing in detail the agreement
between the buyer and seller.

The sales contract is accepted when all parties sign, and is binding once delivered.

Addenda are changes to the contract before acceptance, and amendments are changes after acceptance.

Leases require mutual agreement, a legal purpose, legal capacity, consideration, and competent parties to be valid.

An option contract is an offer to purchase a specific piece of real estate, without the obligation to buy.

The buyer pays an option fee to the seller.

Prior to the buyer exercising the option, an option contract is unilateral, meaning only the seller is bound to fulfill the
contractual obligations.
Deeds and Transfer of Title
STUDY SHEET

Title Insurance
Title insurance protects buyers and lenders (through separate policies) against financial loss that might be incurred
because of title defects discovered after closing.
Title insurance protects sellers by enabling them to provide clear, marketable title.
The lender's policy offers protection worth the amount of the mortgage loan balance.
In the event of a claim, the title company will either pay the debt or take the claimant to court. If the title company pays
the claim, it may seek reimbursement from whoever caused the loss.
The title insurance policy will include a schedule of exceptions that identifies items the policy won't cover, such as:
Claims made by a person leasing the property
Mechanic's or other liens filed after the policy is issued
Disclosed and undisclosed easements and rights of way
Taxes, special assessments, and other liens that weren't on the public record when the policy was issued

Title Searches
The title insurance company performs a public records search in an attempt to discover any potential claims against the
property.
A title abstract (abstract of title) is a summary of the property's title history. Attorneys and title companies who prepare
abstracts use public records to identify the title history.
The chain of title establishes the path of property ownership from its first owner to the current owner.

Clouds on Title
A cloud on title is any encumbrance, such as a lien or inheritance claim, that prevents the seller from providing clear,
marketable title.
Clouds on title may be simple (such as unpaid taxes) and easily remedied. They may also be more complex, such as an
outstanding ownership claim on the property.
A simple foreclosure or inheritance claim may be resolved by having the owner sign a quitclaim deed, which releases any
claim they have on the property.
More complicated clouds may be resolved through a quiet title suit, in which the property owner goes to court to attempt
to remove (quiet) any claims to the property.

Common Title Problems and Resolutions

Title issues can occur with any kind of property. These issues make financing difficult and, if not resolved, make it more
difficult to sell the property later.
There are six common title issues:
Errors in public records
Missing heirs
Forgeries
Unknown liens
Survey or boundary issues
Conflicting wills

Title Issues with Foreclosures and Short Sales

Foreclosure and short sale transactions may cause special title and closing issues that licensees and buyers need to take
into consideration.
Licensees should encourage buyers to opt for owner's extended title coverage for all distressed property sales.
Properties may be in less-than-ideal condition.
Unpaid taxes and other liens or encumbrances are more likely to require resolution.
More complicated transaction paperwork and the need for additional experts, such as attorneys, may increase costs.
Individual states' redemption processes may permit previous owners to take the property back.
Time from offer to closing may be lengthy because it takes time to work through all the processes.

Title Issues with REOs

Properties for which ownership has reverted to the lender because of a failed foreclosure sale, called REO or real estate
owned, may still be subject to buyers' rights of redemption, depending on the state.
Title issues are less common with short sales than with foreclosures.
Time from offer to closing may be lengthy because of the more complicated processes involved.
 Clouds on title aren't uncommon, though lenders hoping to unload the property may clear those before putting it on the
market.

Definition and Purpose of a Deed

A deed is a written and signed legal instrument of conveyance.
The deed establishes proof of ownership and is the document that legally transfers (conveys) title to real property from the
owner (grantor) to the new owner (grantee).
Property conveyance may be either voluntary or involuntary.
Voluntary alienation occurs when a property is willingly sold or conveyed.
Involuntary alienation occurs when the property is seized by court order or foreclosure.

Essential Elements of Deeds

Deeds must be in writing and must include the following elements:
A specifically named and identified legally competent grantor
The grantee's name
Act of conveyance (the granting clause, such as "... does hereby bargain, grant, deed, and convey ...")
Named consideration (such as "for one dollar" or "for good and valuable consideration")
Legal description
Any limitations or subject toclauses
Habendum clause (defines the type of interest and rights the grantee will have
Grantor's signature

Acknowledgment and Recording

Ownership transfers after the grantor (seller) signs the deed, the signature has been acknowledged (notarized), the grantor
delivers the deed to the grantee (buyer), and the grantee accepts the deed.
To protect the buyer's ownership, the deed must be recorded. Only properly acknowledged deeds may be recorded.

Deed Types
The most common deed types are general warranty, special warranty, and quitclaim deeds.
A general warranty deed (also called a full covenant and warranty deed) offers the greatest warranty to buyers.
The general warranty deed provides six covenants (promises):
Covenant of seisen: The grantor holds title to the property.
Covenant of right to convey: The grantor has the legal capacity to convey title and has legal title to the property.
Covenant against encumbrances: The grantor assures the grantee that no encumbrances exist other than those
identified in public records or the deed itself.
Covenant of quiet enjoyment: The grantor assures that the grantee's use and enjoyment of the property won't be
burdened because of a title defect.
Covenant of further assurances: The grantor promises to provide any additional assurances that the grantee
reasonably requires and will correct any title defects.
Covenant of warranty: In this most important covenant, the grantor agrees to warrant and defend the title against
the lawful claims of others.
A special warranty deed (also called a bargain and sale deed) typically warrants only against title defects acquired during
the grantor's ownership of the property.
The special warranty deed guarantees that the grantor owns and may convey the property and warranties that the
property is free of any debts or encumbrances not noted in the deed.
Special warranty deeds aren't the norm for residential properties, though lenders may use them to convey bank-
owned properties.
A quitclaim deed carries with it no warranties to the grantee. It only releases any of the grantor's property rights to the
grantee. The quitclaim deed is typically used to clear up a simple cloud on title.
Other types of deeds include court-ordered deeds, such as the executor's deed (to convey property from a decedent's
estate) and a sheriff's or referee's deed (used to convey foreclosed property or property sold for tax liens).

Deeds of Gift and Dedication

Property owners may choose to voluntarily convey property by deed of gift. No monetary consideration is given, and the
recipient can't enforce any warranties against the grantor. The grantee must accept the deed of gift .
Property owners may also voluntarily convey property through dedication by deed . This is often used when developers
must (or choose to) donate a portion of a property to the municipality for common use.
The grantee isn't required to accept the dedication by deed. When accepted, it's usually for an altruistic reason (the
municipality can use the property to the public's benefit). When it's not accepted, it may be because there are
issues with being able to use or maintain the property offered as a dedication.
A deed in trust (or deed of trust) conveys real estate to a trustee for the beneficiary named in the deed. For example, in
states that use a non-judicial foreclosure process, the deed is conveyed to a trustee who holds it until the mortgage loan is
paid in full OR until the borrower defaults and the lender must foreclose.
Conveyance After Death
Upon a property owner's death, property may transfer either by operation of law (through the type of tenancy in which the
property is held) or according to the terms of a will. Operation of law may supersede distribution by will.
People who die without a will are said to have died intestate .
Intestate succession laws determine how property is distributed.
Heirs take title by descent (the way they're related to the deceased) in order of priority (spouse, children, parents,
and siblings).
Property is distributed to heirs by a court-appointed administrator.
If no heirs are found, the state may take title to the property through escheat .
The appointed executor carries out will provisions when an Individual dies testate (with a will).
The estate of a decedent may have to go through probate, a process that validates the will and supervises distribution.
A gift of real property is a devise ; the person who writes the will is the devisor , and a recipient is the devisee .
A gift of personal property is called a bequest or legacy, and the recipient is a legatee.
Three common will types exist:
1. Statutory: Used for straightforward situations; in some states, may be checkboxes and fill-in-the-blank forms
2. Holographic: Handwritten and unwitnessed; may or may not be recognized as a legal will
3. Oral: Will provisions are spoken to witnesses; may only be used under certain circumstances and may or may not
be recognized as a legal will

Property Tax Considerations

Municipalities prefer property tax revenue over sales or income taxes because property tax revenue is easier to predict and
more likely to be paid.
Property taxes pay for a variety of municipal services.
Property taxes are ad valorem , which means they're based on the property's assessed value .
There are property tax implications for real property owners at each stage of the property ownership lifecycle: acquisition,
ownership, and sale (reversion).
The tax rate applied to the assessed value is determined by the jurisdiction's budgetary needs and may be subject to
legislated restrictions.
Licensees in most states have a fiduciary duty to assist clients in identifying the property tax amount, understanding how
taxes are calculated, and ensuring that no tax liens exist on the property.
Buyers should be informed that a property sale may trigger reassessment of the property's value, causing a change in
property taxes.
When transferring real property both the buyer and seller will be responsible for a portion of the property taxes at closing.

Transfer Taxes
In some states, a real property sale triggers a transfer tax that's collected at closing and payable when the deed is
recorded.
Transfer tax may be paid by either the buyer or seller, as negotiated between them.
Transfer tax rates vary by location, but the rate is usually a percentage of the total sale price or a dollar amount per
$1,000 of the sale price.
o e sure you know the transfer tax rate and procedures in the areas where you practice.

Income Taxes and Real Estate

The purchase, ownership, and sale of real property has tax implications for buyers and sellers.
Be sure not to overstep your bounds and give any kind of tax advice to clients.
Income tax implications for homeowners include:
Potential deduction of points paid and prepaid interest at acquisition
Potential deduction of property taxes, mortgage interest, and depreciation during the ownership phase
Exclusion of some or all of the gain on the sale of a personal residence, depending on circumstances

The Closing Process

Closing occurs when all parties have fulfilled their obligations, the title company has completed the title search and issued
title insurance, the lender has disbursed loan funds, and necessary documents are executed.
Closings may be held at the lender's office, the title company, or an attorney's office.
Closings may occur face-to-face (with all parties present) or in escrow (at different times/locations with a neutral third
party holding the funds).
The closing agent, sometimes called the settlement officer or agent, may be a closing attorney, lender's or title company's
representative, or buyer's or seller's broker.
Several contracts are consummated at the closing:
The lender and borrower close on the loan commitment.
The borrower and title company close on the title insurance contract.
Clients, licensees, and brokerage firms close on their respective compensation agreements.
The buyer and seller close on their respective agency agreements.
The various contracts executed at closing enable different actions by the parties:
 Sales agreement permits the buyer to occupy the property.
Mortgage loan commitment requires the borrower repay funds as noted in the loan.
Title insurance contract results in delivery of the title policy upon premium payment.
Listing agreement secures compensation for the listing brokerage.
Brokerage agreement secures compensation between the seller's and buyer's brokerage firms.
Compensation agreement between the licensees and their firms secure compensation paid to each licensee.

Closing Agent Tasks

The closing agent is responsible for preparing for and conducting the closing meeting, and will perform or delegate many
closing tasks:
Properly manage any escrow funds.
Manage transaction documents and instructions from the parties.
Perform (or delegate the performance of) the title search.
Work with lenders and other necessary third parties to get required information.
Manage contract instructions, broker commissions, and title policy.
Prepare closing documents and conduct the closing meeting.
Record required documents.
Verify funding of the buyer's loan and arrange payoff of the seller's loan.
Distribute funds.
File 1099-S forms as necessary.

Prorations
Shared expenses that either party owes at closing are prorated (divided between) the parties depending on when closing
occurs.
Typical prorations include:
Property taxes and HOA dues
Fuel (propane or oil tank)
Water and sewer charges
Prorated items will be either accrued or prepaid.
Accrued expenses are items the seller owes on closing day but that will eventually be paid by the buyer (e.g.,
unpaid current property taxes). They appear in the seller's debit column and the buyer's credit column.
Prepaid expenses are those already paid by the seller but that the buyer should pay a portion of (e.g., prepaid real
estate taxes, utilities paid in advance). These items are credited to the seller and debited to the buyer.

RESPA and the Closing Process

RESPA, the Real Estate Settlement and Procedures Act, ensures that borrowers receive proper disclosures about to their
federally related residential mortgage loan.
The required disclosures are referred to as TILA-RESPA Integrated Disclosures (TRID).

Settlement Statements
The TRID required settlement statement is called the Closing Disclosure (CD) and identifies who pays what at closing.
A debit is a charge that a party must pay.
A credit is a charge that a party has already paid, an amount that will be reimbursed, or an amount that is promised.
Lenders must provide the CD a minimum of three days before closing.
Licensees may provide estimates of the seller's costs before closing on a seller net sheet.

Estimating Closing Costs

Property transfer fees that aren't included in the sales price are called closing costs. These costs may include:
Loan fees
Appraisal and survey fees
Title insurance
Legal fees
Real estate commissions
Tax and insurance prepayments
Transfer fees
Lenders must give buyers a written estimate of closing costs within three days of the borrower's loan application.
Licensees may provide sellers with a seller net sheet to help them estimate what their net proceeds at closing will be.
Key Areas of Concern in Real Estate Practice
STUDY SHEET

Earnest Money
Buyers offer earnest money to show their intention of following through with a transaction.
Earnest money funds don't belong to the seller, but instead should be kept in an escrow/trust account until all contractual
conditions have been met.
Ideally, earnest money goes toward a buyer's down payment, but it may be used to compensate the seller if the buyer
breaches the contract.
If the transaction goes to closing, the escrow agent disburses escrow funds when all parties to the transaction, including
the lender, are satisfied that all conditions have been met.
Commingling and conversion are two primary ways licensees can go wrong when handling earnest money.
Commingling is when trust (escrow) funds are mixed with personal or brokerage firm funds.
Conversion is the use of trust funds for anything other than the intended purpose.

Fair Housing
Federal fair housing laws list seven protected classes: race, color, religion, national origin, sex, familial status, and
disability.
The Civil Rights Act of 1866 prohibited housing discrimination based on race or color.
The federal Fair Housing Act of 1968 prohibits discrimination based on race, color, national origin, and religion.
The Community Development Act added sex to the list of protected classes.
The Fair Housing Amendments Act of 1988 extended fair housing protection to cover familial status and disability.
Real estate licensees are prohibited from discriminating based on a protected class in any real estate transaction. That
includes sales, rentals, advertisements, financing, brokerage services, and appraisals.
The Fair Housing Act prohibits specific acts, such as redlining, blockbusting, and steering.
Licensees must not discriminate against protected classes or violate fair housing law in advertising.
Some exemptions to federal fair housing laws exist.
The Housing for Older Persons Act of 1995 provided exceptions for housing specifically designed for seniors.
Owner-occupied buildings with no more than four units may be exempt (commonly known as the Mrs. Murphy
exemption). The rental of these units may not use discriminatory advertising or discriminate if a licensee is
involved in the transaction.
Single-family housing sold or rented without a broker's assistance (if the owner doesn't own more than three
properties at one time)
Housing operated by religious organizations or private clubs that limit occupancy to members
Note: Discrimination based on race is never permitted.
The Office of Fair Housing and Equal Opportunity enforces federal fair housing laws.
Victims (not brokers or licensees) can file fair housing complaints through the Office of Fair Housing and Equal
Opportunity up to one year from the time the alleged discrimination occurred.
A fair housing specialist reviews the complaint, determines if a violation exists, and, if so, assists the victim in filing an
official complaint.
If found guilty of federal fair housing violations, licensees may face license suspension or revocation, lawsuits, and
payment of compensatory damages.

Advertising and Technology

Puffery: Statement which appears to a reasonable person as an exaggeration that wouldn't be relied on
Misrepresentation: A reasonable buyer would consider the statement reliable
Negligent misrepresentation: Someone makes a statement she should have known was false; becomes fraud when it's
intentional
Fraud and intentional misrepresentation are essentially the same thing.
Omission of a material fact is considered intentional misrepresentation.
Truth in Advertising Laws: The Federal Trade Commission Act protects consumers from unfair and deceptive advertising.
Deceptive ads are those that are likely to mislead a reasonable consumer.
Unfair ads are those that advertise any business practice or product that's likely to cause injury.
The FTC pays particular attention to ads that make health and safety claims.
The Telephone Consumer Protection Act, managed by the FCC, created the Do Not Call Registry. Real estate
professionals must adhere to the law when making phone calls.
Potential MLS violations include fair housing, privacy and security breaches, self-promotion, false and misleading
information, absence of photos, and failure to update information in a timely manner.
Areas of concern with technology include misuse of email, social networking, and websites; reducing risk to computer
systems; avoiding online rental scams; and social media blunders. Mistakes in these areas can expose clients, licensees,
and designated brokers to potential harm and litigation.
Wire fraud is on the upswing and can cost buyers hundreds of thousands of dollars.
Take all necessary precautions to protect email accounts from hackers.
 Warn buyers to never wire funds based on information in an email.
Encourage clients to call or visit their closing agent directly to get wiring instructions.
A solid policies and procedures manual that discusses the use of technology can help licensees avoid litigation. Brokerage
firms found guilty of violations may be subject to court-ordered supervision for up to 10 years.
Real Estate Brokerage
STUDY SHEET

Broker/Salesperson Relationship
Brokers are responsible for the actions of both their associated licensees and other members of the firm.

A policies and procedures manual is a crucial measure in reducing risk.

Licensees may operate as brokerage employees or as independent contractors.

Broker-Independent Contractor or Employee Agreement

The terms of a broker/salesperson relationship are spelled out in the independent contractor agreement or employee
agreement.

Brokers don't withhold income or Social Security taxes from or pay unemployment compensation based on commissions
paid to independent contractor licensees.

To qualify for independent contractor status, licensees must be permitted to set their own hours and conduct business as
they see fit (while complying with licensing laws and ethics rules).

Broker-Salesperson Compensation
Consumers compensate brokers for their services, generally in the form of a percentage of the sales price of the property
(a commission).

The amount a salesperson is compensated depends on the agreement with the broker.

Salespersons may only receive compensation through their broker.

The concept of procuring cause relates to compensation and refers to the party who starts the chain of events that leads to
the sale.

General Ethics
Laws and professional standards offer minimum ethical guidelines but can't provide guidance for every situation.

When faced with an ethical dilemma, the Golden Rule always points the way to the most ethical course of action.

Licensees' behavior must be ethical in all situations and stand up to the "light of day" test.

The duty of reasonable skill and care means you don't offer advice in areas in which you have no expertise.

Acting outside the scope of your license by offering legal advice is unauthorized practice of law.

Due Diligence
You must disclose any personal interest in a property to all parties.

You must account for all monies placed in your trust.

You must disclose your agency relationship with the seller.

You must ensure all parties have a signed copy of any transactional paperwork, and maintain records for the statutory
period.

You must investigate any discrepancies of a material nature.

You should recommend buyers get an inspection.

Reducing Risks
Brokerage firm policies and procedures-and the related policies and procedures manual (PPM)-establish guidelines that
help reduce liability.
 Brokers must ensure that everyone complies with policies and follows procedures outlined in the PPM.

Penalties for violation of policies or procedures must be enforced and consistent.

Company checklists, E&O insurance, training, legal counsel, effective communication, and proper transaction
documentation also help reduce risk.

Antitrust Laws
The Sherman Act, Clayton Act, and Federal Trade Commission Act are all federal antitrust laws that protect consumers
from tie-in arrangements, group boycotting, price fixing, and market allocation. Antitrust involves businesses that
conspire to restrict competition or trade, resulting in diminished choices or higher prices (or both) for the consumer.

Price fixing involves an agreement between competitors to fix terms, services or products at a specific price or level, such
as suggesting there's a "standard" fee for broker compensation.

Market allocation involves an agreement to divide up the market and then refraining from competing for business.

Tie-in arrangements include providing a service dependent on the customer/client obtaining (or not obtaining) another
service from a specific provider.

Group boycotting is an agreement between two or more parties conspire to not do business with a particular person or
company.

Penalties for price fixing or market allocation violations may be as high as $1 million and 10 years in prison; for
corporations, as high as $100 million.

Under certain circumstances, penalties may be increased to a fine of twice the perpetrator's gain or the victim's loss.

Brokerage firms found guilty of violations may be subject to court-ordered supervision for up to 10 years.

Referral and Finder Fees

Like other forms of compensation, you may receive referral or finder fees only through your broker.

You may not receive undisclosed transaction-related compensation from any party.

Referral fees to and from other real estate licensees are legal, but they must be disclosed.

The Real Estate Settlement Procedures Act (RESPA) prohibits licensees from giving or receiving referral or finder fees
from or to mortgage brokers, title reps, or any other settlement provider.
Real Estate Math
STUDY SHEET

Calculating Area and Length

Area of rectangle = length x width (6 x 4)

Area of square = side x side (4 x 4)

Area of triangle = ½ base length x height

Price per sq. ft. = sale price ÷ area

Example: ($93.75 per sq. ft. = $75,000 ÷ 800 sq. ft.)

Potential home value = $ per sq. ft. x area

Break irregular shaped areas into basic shapes (square, rectangle, triangle), calculate area of each, then add for total area

One acre = 43,560 sq. ft.

Hectare = 10,000 sq. meters (2.47 acres)

Front foot (frontage) is the length of property running along a street, highway, or water way.

Perimeter = the length/width of all sides added together (i.e., the perimeter of a 3x4 rectangular property = 3+3+4+4 = 14)

Loan Origination Fee and Value Ratio

Loan-to-value (LTV) is a calculation lenders use to determine the loanable amount of a given property. Some lenders will
lend up to 90% of the value of the home. "Value" is the lesser of either the appraised value or the sales price.

Loan-to-value ratio (LTVR) = loan amount ÷ home value) x 100

Example: A loan of 90% is called a 90/10 loan. The loan covers 90% of the sales price; 10% is the borrower's
down payment.

Lenders will sometimes charge loan origination fees for processing the loan.

Loan origination fee = loan amount x loan origination percentage

Loan origination fees vary and are typically between 1% and 3%.

Equity

Equity is the amount of value a homeowner has in a property after debts (such as a loan).

Equity formula = appraised value - amount owed

The appraised property value and the down payment amount on the loan impact the amount of equity in a home.

A portion of each monthly mortgage payment goes toward principal and helps increase the homeowner's equity, so it's
considered equity buildup.

Points

Discount points are pre-paid interest borrowers pay at the beginning to reduce their monthly mortgage payments.

One point is 1% of the loan value.

Origination points are what the lender uses to cover costs for the loan.

Amortization

Amortization is paying off a loan over time.

 A portion of each monthly payment goes toward both principal and interest.

Typical amortized loans: mortgages, auto loans, and lines of credit

At the beginning of a loan term, most of the monthly payment goes toward interest. As the years go by, a larger
percentage of each payment goes toward the principal, but the monthly loan payment stays the same.

Amortization calculations help determine monthly payments for different loan products and provide a clear picture of a
loan's total interest and cost.

Use an amortization chart to calculate a monthly principal and interest payment by determining the loan term and the
loan's interest rate percent.

Amortization chart example: A 2.000 (rate %) for a 15-year loan term = a factor of 6.43509. Then calculate
monthly payment = (loan amount ÷ 1,000) x factor

An amortization table provides a payment schedule and shows the interest and principal paid over the loan term.

Debt service is used to determine how much additional debt a person can reasonably take on.

Debt service = monthly payment x 12 ($2,000 per month x 12 = debt service of $24,000)

Down Payments

Most buyers pay a down payment on a loan, usually between 3% and 20%.

Earnest money will be applied to the down payment amount owed by the borrower at closing.

At close, the borrower provides a cashier's check, certified check, or wired funds to cover the remainder of the down
payment and closing costs.

Various loan types may provide other down payment options besides the traditional 20%.

Money buyers have in savings is the best source of down payment funds and lenders' preferred source.

Home buyers may be able to borrow from their retirement funds, including Roth IRA accounts.

Lenders will look at how long the borrower has had access to any gifted funds to help determine whether they're a gift or a
loan.

Lenders will include any funds borrowed for a down payment in the debt-to-income calculation.

Down payment assistance from organizations (e.g., churches) or programs may be available.

Basic Mortgage Qualifying

Debt-to-income ratio is often abbreviated DTI.

Lenders look at a borrower's housing and total debt-to-income ratios.

Net income = gross income - taxes and expenses

To qualify for a conventional loan, total debt-to-income ratio can't exceed 33% to 36%.

Housing debt-to-income ratio usually can't exceed 25% to 28%.

Gross income, not net income, is used to calculate total and housing debt ratios.

The total ratio includes all recurring (or installment) debt that will last longer than 10 months, such as monthly mortgage,
car, credit, and loan payments.

The housing ratio includes monthly housing obligation (principal, interest, taxes, insurance) and HOA/condo association
fees.

Total debt ratio = (total of monthly debt obligations ÷ monthly gross income) x 100

Housing debt ratio = ([principal + interest + taxes + insurance + association fees] ÷ monthly gross income) x 100

Interest
 Mortgage payments consist of principal, interest, taxes, and insurance (PITI).

Loan balance x interest rate = annual interest amount

Annual interest ÷ loan balance = interest rate

Annual interest ÷ interest rate = loan balance

Calculating Property Taxes

Property taxes are the largest funding source for local services, such as schools, roads, and police and fire protection.

Calculating property taxes requires knowing three numbers: appraised value, assessment ratio for the property type (this
may vary by state), and the tax rate.

The county property tax assessor determines the property's appraised value.

Appraised value x assessment ratio = assessed value

Assessed value x tax rate = annual property tax

Transfer and Mortgage Tax

Transfer tax is applied whenever real property is sold. It varies by state and is typically paid by the seller but is negotiable
between the parties.

A mortgage recording tax is a tax on the privilege of recording a mortgage on real property located within the state. Not
all states charge a mortgage recording tax, and the rate varies by state.

Calculating Per $100 divide by 100 (or move the decimal two places to the left). Example: $2.75 per $100 is 0.0275

Prorations

Sellers typically pay costs on the day of closing for property taxes, utilities, etc.

Beginning the day of closing, typically all expenses and income (e.g., from renter) goes to the buyer.

Mortgage interest, taxes, insurance, and other expenses are usually prorated based on a 360-day calendar year (30 days x
12 months).

To prorate taxes in partial months, determine the tax per month and divide by 30, then multiply this amount by the number
of days.

To prorate taxes, take the tax amount and divide it by 12 months to get the amount per month. Then take the per-month
amount and multiply it by the number of full months to arrive at the amount the seller owes for taxes accrued and not yet
paid.

To prorate rent, find the daily rent rate by dividing the monthly rental rate by the number of days in the month. Then
multiply this amount by the number of days the lessee will occupy the property.

Calculating Commissions

Total commission = sales price ($) x commission rate (%)

When multiplying or dividing, it's easier to first convert percentages to decimals.

Convert a percentage to a decimal: Divide the percentage by 100 and drop the percent sign (or move the decimal point left
two places) 2.5% = .025

Convert a decimal to a percentage: Multiply by 100 and add a percent sign (or move the decimal point right two places) .
045 = 4.5%

To convert a fraction to a decimal, divide the top number by the bottom number.

Calculate commission: multiply the home sale price (e.g., $150,000) x the commission rate (e.g., .07 or 7%) = $10,500
(total commission)

Calculate commission % earned: (total commission ÷ sale price) x 100; e.g., $10,500 commission ÷ $150,000 sales price
= .07 (7%)
Net to Seller

The net to seller formula calculates the amount the seller gets after commission is paid.

Percent to seller = 100% of sale price - commission %

Net to seller = sales price x (percent to seller)

Example: Home sale price is $150,000. The commission rate is 7%. The percent to seller is 93%, or 0.93 (100% ? 7%).
Multiply $150,000 by 0.93. The net to the seller is $139,500.

To calculate the sale price to net a specific amount, add the desired net amount to the outstanding loan amount, then
divide by the % to seller.

Calculating Depreciation

Depreciation is a perceived decrease in value.

Investment properties are depreciated for income tax savings based on the initial sales price of the property, minus the
land value.

The depreciation schedule for a residential income-producing property is 27.5 years, and 39 years for non-residential
properties.
Real Estate Specialty Areas
STUDY SHEET

Top Takeaways
You can expect to see only a few questions related to specialty areas such as commercial or investment property on your licensing
exam.

Here's a summary of the content that was covered in this section.

Conditions, Covenants, and Restrictions (CCRs)

May be placed on the property by any property owner at any time during ownership.

May be placed on an individual property, or an entire subdivision or neighborhood.

May either run with the land forever and appear on future deeds, or have a time limit.

Owning and Leasing Commercial Property

Commercial properties include office buildings, retail stores, and restaurants.

Industrial properties include factories and warehouses.

Income properties are managed for cash flow. They can be commercial, industrial, or residential.

Commercial tenants are managed under different rules than residential tenants. The terms of the lease is the primary
method of defining things like security deposits, rents, and building regulations.

Trade fixtures are items that belong to the business owner and are used to conduct business, such as an oven in a
restaurant.

Trade fixtures may be removed by the tenant with the tenant leaves.

Commercial Property Accessibility

The Americans with Disabilities Act (ADA) requires commercial buildings be accessible to disabled individuals, such as
those who use wheelchairs.

Newly constructed buildings must abide by all regulations in the ADA.

Older buildings must make reasonable efforts to remove barriers and make services and public areas accessible for people
with disabilities.

Recommended areas of focus when modifying commercial buildings to meet accessibility requirements are:

Accessible approach and entrances

Access to goods, services, and restrooms

Other necessary measures, such as access to public amenities

Investment Property and Tax Depreciation

Two types of depreciation impact investment properties: economic depreciation and tax depreciation.

Economic depreciation occurs with a loss in value due to physical or other deterioration.

Tax depreciation allows an annual business deduction by depreciating an asset.

Depreciation is limited to investment properties (not residential or non-investment property).

The IRS requires investors to depreciate their investment properties, which is called straight-line depreciation.

The basis of an asset includes the sale price plus acquisition costs and any capital improvements.
 Income-producing residential properties are depreciated on a 27.5-year schedule; commercial properties are on a 39-year
schedule.

1031 Tax Exchanges

1031 tax-deferred exchanges allow investors to defer capital gains taxes when selling a property, provided the money is
rolled into another "like" purchase.

1031 tax-deferred exchanges involve the following deadlines:

Identification of a like property within 45 days of sale of the relinquished property.

Closing on the like property within 180 days from the closing date on the relinquished property.

Trust Accounts for Income Property

All funds entrusted to a licensee on behalf of others in the practice of real estate are by definition trust funds, and should
be handled accordingly.

Security deposits and prepaid rent from residential tenants must be deposited into an escrow account.
Pennsylvania's State Real Estate Commission
STUDY SHEET

Summary
The Real Estate Licensing and Registration Act (RELRA) established the State Real Estate Commission, which is responsible for
the act's enforcement.

Top Takeaways
You can expect to see three questions related to the State Real Estate Commission on your licensing exam (according to PSI, the
exam provider: https://candidate.psiexams.com/bulletin/display_ bulletin.jsp?ro=yes&actionname=83&bulletinid=85
&bulletinurl=.pdf).

Here's a summary of some of the content that was covered, aligned with the exam outline topics.

DUTIES AND POWERS | COMPLAINTS, INVESTIGATIONS, HEARINGS, AND APPEALS | REAL ESTATE RECOVERY
FUND

Duties and Powers (Chapters 3-4, Sec. 202, 305, 604)

Who makes up the commission? The governor appoints all members to the commission:
Commissioner of Professional and Occupational Affairs
Director of the Bureau of Consumer Protection (or a designee)
Three members representing the public (i.e., unlicensed individuals)
Five individuals who are licensed real estate brokers and have been licensed at least 10 years at the time of
appointment
One individual who has been licensed as a real estate broker or cemetery broker for at least five years and has
sold cemetery lots for at least 10 years at the time of appointment
The majority of these members (six of the 11) make up a quorum.
The commission elects a chairman, vice-chairman, and secretary from its members.
How long do commission members serve?
Five years from their appointment or until a successor has been appointed (but not more than six months
following the end of their appointment).
If a member dies or resigns during their appointment, the governor will appoint a successor with similar
qualifications and will serve the remainder of the original member's appointment
How many meetings do commission members attend?
Members must attend regularly scheduled meetings.
There are also three public meetings held each year that members must attend.
One is held each year in Pittsburgh, one in Philadelphia, and one in Harrisburg.
The public receives at least 15 days' notice of these meetings through a local newspaper. The purpose is to
seek comments, suggestions, etc. from the public.
Members who miss three consecutive meetings are at risk of losing their place on the commission, unless the
Commissioner of Professional and Occupational Affairs has provided written permission of the absence.
Are commission members paid? Most members, except the Commissioner of Professional and Occupational Affairs, are
reimbursed for reasonable expenses and receive a per diem of $60 when spending time on commission business.
One of the commission's powers is to levy civil penalties. These can be in addition to civil remedies or criminal penalties
an individual may face.
A majority of the members must vote to impose a civil penalty.
The maximum penalty is $1,000 on individuals (both current licensees and persons practicing real estate without
proper licensure) violating RELRA.
The accused must first have an opportunity to have a hearing before the penalty is levied.
Other powers include issuing real estate licenses , holding hearings to revoke, suspend, or refuse licenses and impose
fines of as much as $1,000 when someone performs a prohibited act or if a license was obtained through false
representation, a fraudulent act, or poor conduct.

DUTIES AND POWERS | COMPLAINTS, INVESTIGATIONS, HEARINGS, AND APPEALS | REAL ESTATE RECOVERY
FUND

Complaints, Investigations, Hearings, and Appeals (Sec. 604(a)17, Chapter 7)

What happens when a complaint is filed against a licensee?

The complaint is investigated. This includes interviews, witness statements, requesting and reviewing
transactional documentation, and gathering any other records needed.
 Serious violations warrant a hearing and may involve the licensee, the complainant, and any witnesses. The
hearing will determine whether a violation occurred. If so, the severity of the violation will determine the possible
penalty (such as license suspension, revocation, and fines).
Failure to cooperate with an investigation may result in a RELRA violation.

Real Estate Recovery Fund (Chapter 8)

The recovery fund doesn't apply to campground membership sales, offers or salespersons or to broker price opinion preparation or
issuance.

How's the fund funded?

Through a $10 fee charged at license issuance and renewal
If the fund has less than $300,000 at the beginning of a license renewal period, then the commission can assess
additional fees (not to exceed $10 per licensee) that would bring the balance to $500,000.
When does money from the fund get paid out? If a consumer is awarded a judgment for fraud,
misrepresentation, or deceit related to a real estate transaction, and they've exhausted all other remedies to
collect the judgment, the consumer can apply to be paid from the fund. To qualify, the consumer must:
Not be a spouse or a representative of the spouse of the licensee
Demonstrate a final judgment has been awarded
Demonstrate they've attempted to receive the judgment through all other means
Apply within one year of the end of the civil proceedings (including appeals) to the court that made the
final judgment
How much can a consumer receive?
The maximum a single consumer can recover is $20,000. There's a maximum payout of $100,000 per licensee,
as well.
If the recovery fund doesn't have enough money to pay the claim, the consumer is entitled to the outstanding
balance plus 6% interest once the fund is replenished.
What happens if the licensee couldn't pay the judgment? Their license will be suspended until the amount paid by the
recovery fund is paid back in full, plus 10% interest per year.
Licensure in Pennsylvania
STUDY SHEET

Summary
Getting your license is a feat, keeping it active is another.

Top Takeaways
You can expect to see six questions related to licensure on your licensing exam (according to PSI, the exam provider:
https://candidate.psiexams.com/bulletin/display_bulletin.jsp?ro=yes&actionname=83&bulletinid=85&bulletinurl=.pdf).

Here's a summary of some of the content that was covered, aligned with the exam outline topics.

Activities requiring a license [Sec. 301, 604(a)(21); 35.304, 35.288(A)]

Here's the list of those activities that would require a license if you're performing them for compensation (or other valuable
consideration) for others :

Engaging in the business of or advertising oneself as being in the business of a: real estate or cemetery broker,
salesperson, or company; campground membership, time-share, or builder-owner salesperson; or a rental listing referral
agent
Negotiating with or aiding any person in locating or obtaining an interest in real estate for purchase, lease, or acquisition
Negotiating the listing, sale, purchase, exchange, lease, time share (and similar), financing, or option for any real estate
Managing real estate
Representing oneself to be a real estate consultant, counselor, agent, or finder
Promoting the sale, exchange, purchase, or rental of real estate (unless the person is one whose main business is
advertising, promotions, or public relations)
Performing a comparative market analysis

Types of licenses - standard or reciprocal [Sec. 201, 511-592, 602, 604(a)(29), 601(a); 35.201, 35.222-.229, 35.245]

Take look back at your 'Definitions Related to Licensure in Pennsylvania' resource for these key definitions.

Eligibility for license [Sec. 501, 511, 521; 35.251, 35.222(a, b), 35.223(b)]

License applicants (and those renewing a license) must demonstrate a good reputation for honesty , trustworthiness , integrity
, and competence to conduct the business for which the license is requested. Take a look back at the 'License Types and
Qualifications in Pennsylvania' resource for additional qualifications for each type of Pennsylvania license.

License renewal and reactivation [Sec. 404(b), 501; 35.203, 35.382]

Licensees are required to complete 14 hours of approved continuing education coursework by May 31 of every even-
numbered year
Failure to renew by the deadline will cause the license to become inactive (real estate services can't be performed
with an inactive license)
Licenses inactive less than five years simply need to complete the renewal requirements [CE, renewal
application, and fees (possibly including a late fee)].
Licenses inactive more than five years need to restart the entire application process (complete pre-
licensing education, pass licensing exam, etc.).
Reciprocal license holders; cemetery, builder-owner, time-share, and campground membership salespersons, as
well as rental listing referral agents are exempt from the 14-CE-hour requirement.

Change of employment [Sec. 603(a)]

Licensees can only be affiliated with a single broker (whose name will appear on the license issued to salespersons and
associate brokers)
If licensees want to affiliate with a different broker, they must notify the commission (and keep a copy of this notification)
no later than 10 days after the change, pay a fee, and return their current license. A new license will be issued with the
new broker's name.
If the new license isn't received within 30 days, the licensee must contact the commission.

Exclusions from licensure (Sec. 304; 35.202)

Some individuals can perform real estate activities without obtaining a real estate license. This includes:
 Individuals selling their own property without engaging a real estate broker
Public utility or energy/mineral resource employees or corporations negotiating a property purchase, sale, or lease for
utility- or energy/mineral resource-related business
Acting as an attorney-in-fact per a power of attorney (POA) from the property owner/lessor
Acting, per court order or trust instrument, as an administrator, executor, or trustee
Bank officers/directors transferring property belonging to their bank, credit union, etc., or performing appraisals or other
property valuations necessary for loan approval
Cemetery officers/employees showing lots and accepting deposits as part of their normal duties
Licensed auctioneers performing auction business
Attorneys performing real estate services only as part of normal attorney-client relations, and when the attorneys have not
held themselves out to be real estate professionals

Suspension and revocation [Sec. 501, 604(a)]

The Pennsylvania State Real Estate Commission has the power to suspend or revoke licenses of those who fail to
demonstrate good moral character or violate license law and regulations.
Revocation usually is for at least a five-year period (after which an individual would have to start the licensing process
completely over if they'd like to practice real estate again.
REGULATION OF CONDUCT OF
PENNSYLVANIA LICENSEES
STUDY SHEET

Summary
The State Real Estate Commission regulates licensee conduct. This section focused on rules regulating that conduct.

Top Takeaways
You can expect to see a whopping 21 questions related to regulation of licensee conduct on your licensing exam (according to
PSI, the exam provider: https://candidate.psiexams.com/bulletin/display_ bulletin.jsp?ro=yes&actionname=83&bulletinid=85
&bulletinurl=.pdf).

Here's a summary of some of the content that was covered, aligned with the exam outline topics.

Advertising [Sec. 604(a); 35.301, 35.304, 35.305, 35.306(a), 35.307]

Check out your "Advertising and Solicitation in Pennsylvania" and "Pennsylvania Guidelines for Internet Advertising"
resources for details on these regulations.

Broker/Salesperson relationship [Sec. 201, 604(a)(16), 604(a)(27, 28)]

Brokers must adequately supervise their associated licensees.

Agency relationships [Sec. 606; 608; 604(a)(7),(25); 606.1(c,d), 606.1(g); 35.311-.316]

Check out your "Agency Relationships in Pennsylvania" for a breakdown of the duties seller agents, buyer agents, dual agents,
designated agents, and transaction licensees owe.

Compensation [Sec. 604(a)(12), (12.1), (19), 606.1(b)(1), 606.1 (d)]

Licensee compensation for real estate services must be paid through the licensee's broker. All commission must be disclosed.
Compensation doesn't create an agency relationship between a consumer and licensee.

Employment of associate broker/salesperson Sec. 603(a)

Licensees may only be associated with one broker at a time. If they choose to change affiliation, they must notify the
commission within 10 days and should alert the commission if they don't receive their new license within 30 days of
the notification.

Duties of licensees generally [Sec. 606.1, 608.3, 201, 702; 35.292]

Check out your "General Duties and Prohibited Conduct of Pennsylvania Licensees" resource for a list of these duties.

Prohibited conduct [Sec. 604(a), 608.5; 604(a)(16)]

Check out your "General Duties and Prohibited Conduct of Pennsylvania Licensees" resource for a list of prohibited
activities.

Disclosures [Sec. 604(a) (7), (13), (15.1), 606.1(a)(7), 606.1(g),608.4; 35.288, 35.339]
Licensees can't act for more than one party in a transaction without written agreement from all parties.

Agency disclosures [Sec. 606.1(a)(6), 606.1(b)(1), 608; 35.284-.285]

The Consumer Notice must be provided upon initial interview. The commission provides a script if disclosure is provided orally.
Check out your "The Consumer Notice in Pennsylvania" resource for more information about agency disclosures.

Property disclosure [Sec. 606.1(a)(4); 35.282]

Licensees must obey the Real Estate Seller Disclosure Act and ensure clients do, as well. They can't provide false assurances or
advice outside the scope of their expertise.

Conflict of interest [Sec. 606.1(a)(7), 606.1(a)(13); 35.283, 35.304]

Any conflicts of interest, including financial interests, must be disclosed in a timely manner. Licensees selling their own property
must disclose their license status.

Documents, contracts, and forms [Sec. 604(a)(6), 604 (a) (10), 606.1(b)(2,3,4), 606.1(c.), 608.1, 608.2,
35.204, 35.331-.334]
Most transaction documents and contracts must be retained for three years (Consumer Notice and sub-agent and transaction
licensee agreements only need to be retained for six months). All contracts must include a specific termination date. Refer back to
your "Required Language in Pennsylvania Real Estate Documents" resource for other requirements.

Funds and accounts [Sec. 606.1(a)(5), 608.5, 35.321- .328]

Licensees must immediately hand over trust fund checks to the broker. The broker must deposit the check in a trust account
within one business day.

Rent received should be deposited into a rental management account separate from a trust or general business account.
A broker's duty related to trust funds can't be waived.
The broker must be listed as the trustee on the account.
Trust funds can't be commingled with personal funds (but brokers can keep personal money in a trust account to maintain
a minimum balance or pay bank fees).
Brokers must maintain detailed records that include the name of the party providing the check; the name of the party the
money belongs to; the deposit account; and the dates money was received, deposited, and withdrawn.

Pennsylvania Human Relations Act [Sec. 604(a)(22); Pennsylvania Human Relations Act, as amended by
Act 34 (1997), 43 PA Statute #951-963]
The State Real Estate Commission may investigate Human Relations Act complaints 90 days after they're filed. Violations of the
act include:

Accepting discriminatory listings

Giving false information for discriminatory purposes
Being selective of housing location or availability for discriminatory purposes

Timeshares [Sec. 609]

Timeshare and campground membership purchasers can cancel their purchase within five days of contract execution. Sellers
must return the deposit within 10 days.
ENVIRONMENTAL AND OTHER ISSUES IN
PENNSYLVANIA
STUDY SHEET

Summary
As a practicing real estate licensee in Pennsylvania, there are several environmental and other issues you should be aware of.

Wetlands
Asbestos
Radon
Polychlorinated biphenyls (PCBs)
Underground storage tanks (USTs)
Pennsylvania Sewage Facilities Act
Other Issues

Top Takeaways
Wetlands:
Pennsylvania's Department of Environmental Protection (DEP) regulates wetland activities through the Dam Safety and
Encroachments Act, Dam Safety and Waterway Management Rules and Regulations, and Title 25 of the Pennsylvania
Code
Activities around wetlands
Some wetlands are distinguished as "exceptional value."

PERMIT NOT REQUIRED

Debris removal (not including gravel and sediment removal)

Channel cleaning of bridges and culverts, limited to 50 feet upstream and downstream of bridge or culvert
Mowing and cutting of brush and trees

PERMIT REQUIRED

Removal of gravel and sediment

Channel cleaning of amounts exceeding 50 feet upstream and downstream of bridges and culverts
Grubbing and excavation

Asbestos:
Asbestos testers must be certified through the Environmental Protection Agency (EPA) or a state-approved training course.
Advance notice must be provided before beginning any asbestos project.
Federal law requires building owners with dwellings that house two or more families to have an asbestos survey
performed before starting a renovation or demolition.

Radon:
Radon is a serious issue in Pennsylvania.
When working for buyers, encourage them to have the home tested for radon.
When working with sellers, inform them the DEP recommends the home be tested for radon before listing.

Polychlorinated biphenyls (PCBs):

The Pennsylvania Boat and Fish Commission has issued a statewide health advisory for recreationally-caught sport fish.
The advisory recommends that consumers (especially children, pregnant women, and women of childbearing age) restrict
consumption of sport-caught fish in Pennsylvania waterways to no more than one meal per week (one half-pound), to
limit potential exposure to contaminants.

Underground storage tanks (USTs):

The Pennsylvania Storage Tank Program regulates underground storage tanks of 110 gallons or more where at least 10%
of the volume is beneath the ground surface.
 The DEP requires owners to install, maintain, operate, and repair their USTs in accordance with department rules and
nationally recognized standards and obtain a valid operating permit. Owners must also pay an annual registration fee to
the DEP.

Pennsylvania Sewage Facilities Act:

The purpose of the Pennsylvania Sewage Facilities Act is to "protect the public health, safety and welfare of our citizens
by developing and implementing plans for the sanitary disposal of sewage waste."
The act requires the seller to disclose to the buyer the type of sewage system that serves the property: public, community,
an individual on-lot sewage disposal system, or other. If a property is not serviced by a public sewage system and no
community sewage system is available, a permit must be obtained. Other Issues:
Oil and gas leases are regulated by the Oil and Gas Act, Coal and Gas Resource Coordination Act, and Oil and Gas
Conservation Law.
The Interstate Land Sales Full Disclosure Act, passed in 1968, regulates land sales across state lines in order to keep con
artists from selling property to unsuspecting consumers sight unseen.
The commission requires promotional land sales to be registered before they can be promoted for sale in Pennsylvania.
The Homeowner Emergency Assistance Program (HEMAP) provides a stay of foreclosure while the borrower gets
counseling or seeks assistance. Types of foreclosure include:
Judicial: used most often in Pennsylvania and involves the court system
A deficiency judgment is when the foreclosure sale doesn't cover the amount owed, and the lender goes
after the borrower to recover the shortage.
Non-judicial: doesn't involve the court system and is permitted through a power of sale clause
Strict: After providing borrower notice, papers are filed with the court, which gives the borrower a deadline to
pay. If not paid in full by that deadline, legal title is awarded to the lender.
Appraisers in Pennsylvania must be certified whether a transaction is federally related or not.