NCE PRACTICE EXAM

When personal property is attached to real property to such an extent that a person cannot extract the item from the real property without damaging the real property, the item is a fixture. Another test to determine whether an item is a fixture is whether the item is so adapted to the real property, that to remove the item will diminish the value or utility of the real property. Of course, if the purchase contract specifically includes a certain item with the sale of the property, that item must be regarded as a fixture, whether it meets the legal definition of fixture or not. Likewise if the purchase contract specifically excludes an item from the sale, it must be regarded as personal property, and should be removed.

Land is characterized as immovable because an entire parcel of real estate cannot be moved to another site. Land is considered indestructible because, in contrast to buildings, an entire parcel of real estate theoretically cannot be destroyed and/or need to be replaced. Land is considered unique because, at the very least, each parcel of real estate has its own different and distinct place on the planet. Finally, land is considered scarce because entire new parcels of real estate cannot be manufactured.

Test-Taking Tip: Because the words "unique" and "indestructible" are in each answer choice, you do not need to spend valuable exam time considering them.

B is incorrect. Land does not depreciate. Why not? Because, in contrast to a house or a building, an entire parcel of land does not wear out and need to be replaced. Test-Taking Tip: Make sure you remember this rule for your exam: Land does not depreciate. C is incorrect. Despite there being a lot of land, land is considered scarce as brand-new parcels of land cannot be created through human labor. D is incorrect. Land is not considered moveable. While topsoil or even a building can be moved, an entire parcel of real estate cannot be moved to a new location.
 

A fee simple estate is ownership that gives a person or entity complete control (subject to standard governmental restrictions). A life estate gives a person ownership or control of a property only for the duration of his/her natural life. Defeasible estates (estates which can be defeated) give a person or entity control over a property only so long as certain conditions are met or avoided.

This series of words best describes what has happened on Daniel's property. As it pertains to real estate, "accession" means to acquire more land, even a small amount of land. "Accretion" is accession that occurs through natural causes. Here, what happened on Daniel's land is accession by accretion because the natural action of the river's water deposited silt on the shores of Daniel's property. Finally, "alluvium" is a technical term for the silt/dirt moved by the river from Ulyanna's shores and deposited on Daniel's shores.

A is incorrect. "Alienation" means to separate real estate from its owner. Alienation can occur either through voluntary means (e.g., sale, gift, dedication, etc.) or involuntary means (e.g., foreclosure, tax sale, adverse possession, etc.). Here, Daniel is acquiring property, not losing it. Answer Choice "A" is also incorrect because of the word "attachment." While attachment is property gained through accession, attachment is created through human intervention. For example, if a tenant had rented Daniel's property, constructed a shed on it, and then left the shed after the lease was over, that would have been an example of accession by attachment. Here, Daniel is gaining additional property through the natural action of the river's water (i.e., accretion). B is incorrect. Littoral has to do with rights of owners who live by standing water, like a lake, a pond, or the ocean. There is nothing in the fact pattern to suggest either parcel of property is near a body of standing water. C is incorrect. These terms are used by appraisers to describe the increase in value when an owner combines several contiguous or touching parcels into one large parcel. The act of combining several parcels into one parcel is called "assemblage." The increase in value that should result from the consolidation is called "plottage." (e.g., five separate parcels each have a value of $100,000 totaling $500,000. After assembling them together into one large parcel, the value of the one large parcel is $525,000. The additional $25,000 is plottage.)
 

Equity is not directly affected by the purchase price for the property; nor is it directly affected by the amount of down payment put forth at the time of the purchase. Many owners are under the misguided belief that a high down payment will always result in high equity. This is only true if the market value of the property remains the same as it is when the down payment is given; or increases after the down payment is given. If the market value of the property decreases, the equity in the property will decrease also, regardless of the purchase price and down payment amount.

The life tenant (i.e., the aunt) can take out a loan on the property without the remainderman's signature. However, if only the life tenant life signs the loan documents, then the debt will die with her. In order to protect the lender's security interest in the event of the aunt's death, both the life tenant and the remainderman will need to sign the loan documents. The same would be true if the property were being sold: Both the life tenant and the remainderman would need to sign the deed in order to ensure that the buyer's ownership interest in the property would continue after the life tenant dies.

Test-Taking Tip: Remember a life estate is an estate of ownership (aka a "freehold" estate). With a life estate, there is a "present interest" and a "future interest." A simple way to figure out who owns each interest is to ask yourself the following two questions: "Who has the right to possess the property in the present?" Here, the aunt does: She holds a present interest in the property, and, because she is the measuring life, she will hold that interest until she dies. "Who will have the right to possess the property in the future?" Here, the nephew does: He holds a future interest in the property.

A is incorrect. Provided that both the life tenant and the remainderman sign the loan documents, the lender's security interest in the real estate will be protected if the life tenant dies during the term of the loan. B is incorrect. If the remainderman does not sign the loan documents, the lender's security interest in the real estate will terminate upon the death of the life tenant. C is incorrect. A nonfreehold estate is a leasehold estate. A life estate, by contrast, is a freehold estate (i.e., an estate of ownership).

Ownership in severalty occurs when there is only one owner of a parcel of real estate. The owner can be, for example, an individual, a corporation, a governmental entity, a trust, or a partnership. As long as it is sole ownership, it is an ownership in severalty (aka "an estate in severalty"). Test-Taking Tip: This is frequently tested because of the word "several" in "severalty."

A is incorrect. Concurrent ownership occurs when there are multiple owners of the same parcel of real estate holding title together at the same time. C is incorrect. If there are multiple owners (e.g., one owner owns 90%, a second owner owns 9%, and the third owner owns 1%), ownership is described as "fractional, but undivided." This means that--no matter how small their ownership interest is--each owner has an equal right of possession as to the entire parcel of land. D is incorrect. If two owners hold title with a right of survivorship, and one owner dies, then the survivor acquires the decedent's interest in the property automatically, through operation of law. Depending on the state, common ways to hold title with a right of survivorship include: tenancy by the entirety, joint tenancy, and/or community property with right of survivorship.
 

A metes and bounds legal description begins at a well-defined point (point of beginning or POB) and follows the boundaries of a parcel of land, using directions and distances around the tract, and ends at the point of beginning. When properly written, it is acceptable and enforceable in all court jurisdictions, and can be created for any parcel of property. Oftentimes, a deed will contain two types of land description. Generally, a metes and bounds description is accompanied by a rectangular survey (or government survey) description or lot, block and tract description.

An easement appurtenant allows the holder of one property to benefit from another's. In this case, your property is servient because it is the one burdened by the easement while your neighbor's is dominant since it is the one that benefits. If you would have given permission to the neighbors to use your driveway, you would have effectively licensed the neighbors, not the property. (The word "license" is not typically used as an adjective for the word property.)

The easement described in the test question is an easement appurtenant. The old owner, who split his large parcel in two, created the easement by reserving it in the deed to the individual who first purchased Parcel South. In an easement appurtenant, there is a dominant tenement (i.e., the parcel that benefits from the easement) and a servient tenement (i.e., the parcel that is burdened by the easement). Here, the parcel that benefits from the easement is Parcel North because the easement allows the owner to cross over the westerly 8 feet of Parcel South to get access to the road. Parcel South is burdened with the easement because people who don't even own the land are allowed to use the westerly 8 feet of Parcel South for ingress and egress purposes. The owner of a parcel of real estate burdened with a servient tenement cannot unilaterally terminate an easement appurtenant. An easement appurtenant "runs with the land" and transfers with the deed. Therefore, by fencing in Parcel South, the new owner of Parcel South will most likely be found to have violated the easement conditions and will lose the lawsuit.

B is incorrect. An easement in gross only has one parcel of land (a servient tenement). The classic example of an easement in gross is a public utilities easement. The public utility does not need to own a contiguous parcel in order to have an easement in gross. This test question states that there are two parcels of land, a dominant and a servient tenement. Therefore, this fact pattern does not describe an easement in gross. C is incorrect. A landlocked property is one without access to a street or road. An easement by necessity is created by the courts when a property is landlocked--provided that the owner of the landlocked parcel did not create the problem. Here, when the old owner split the large parcel into two, the old owner carefully reserved an easement over Parcel South, preventing Parcel North from becoming landlocked. Because the old owner reserved an easement in the deed, there was no need to go to court and ask for an easement by necessity. D is incorrect. This answer choice states the general rule, but the owner of Parcel South purchased the property subject to the easement. Because easements appurtenant run with the land, the easement is binding on the new owner of Parcel South.
Test-Taking Tip: Pay close attention when you see answer choices that are almost identical like "A" and "B." Frequently, when two choices are so close, this is what the examiners are testing.
 

As stated in the Fifth Amendment to the U.S. Constitution, governmental entities have the right to "take" private property for public purposes. This power is called eminent domain. Taking private property to widen a highway is a classic example of when the government (e.g., city, county, state, or federal) would exercise its power of eminent domain. However, the Fifth Amendment to the U.S. Constitution does state that government entities exercising this power must pay the private property owners just or fair compensation.

A is incorrect. Condemnation is the name for the legal proceeding to determine what just or fair compensation is for each parcel of real estate taken by the government. It is not the name of the government power itself. B is incorrect. The government's police power is the right of the government to establish and enact laws to promote public health, public safety, public welfare, and morals. Two classic examples of police power are zoning and building codes. Test-Taking Tip: When the government exercises its police powers, typically no compensation need be paid to affected property owners. D is incorrect. In our legal system, real estate must be owned by someone. In England, if the owner abandoned a parcel of real estate or died without a will (i.e., intestate) and without heirs, the property "reverted" back to the original owner, the Crown. In the United States, this parcel of real estate would revert back to the state. This governmental power is called "escheat."

Test-Taking Tip: In addition to police power, eminent domain, and escheat, the government also has the power to tax real estate. Your memory aid for these four governmental powers over land is PETE: Police Power, Eminent Domain, Taxation, and Escheat. These are four separate powers. Be careful not to let the examiners trick you into lumping several powers into, say, police power.
 

There are no nationwide or statewide zoning ordinances but governments may regulate land use through special legislation such as national park regulations, wildlife preserves, coastal management, and environmental laws. Zoning laws, as implemented in cities and counties, identify the permitted use of each parcel of land.

Blockbusting, for the most part, is no longer a common practice, although it may happen indirectly through inappropriate conversations and statements by real estate licensees. The purpose of the blockbusting scheme is to get the homeowners to sell out at a deflated price; then sell the vacated homes to minority group members at an inflated price. Involvement in a blockbusting scheme is grounds for criminal charges.

The U.S. Constitution limits government power, and requires that governmental actions and statutory regulations cannot take away property rights without due process, unless there is a compelling government interest to do so. Protecting the health, safety and welfare of the citizens of the community has long been accepted as such a compelling government interest. Police power is the power of the state to enforce laws and rules that protect the members of the community. Since owners take title to their property subject to zoning laws, enforcement of the zoning laws is constitutional.

Specific liens are secured by a specific piece of property. General liens are secured by the collective assets of the debtor. Many borrowers are under the misguided impression that there is no collateral securing a general lien (such as a credit card lien or signature loan). While both types of liens require collateral, general liens are actually secured by more collateral than specific liens. A lienholder of a general lien is within its rights to foreclose on any of the assets of the debtor; whereas a lienholder of a specific lien may only foreclose on the specific collateral named in the lien.

The test question states that the listing agreement was formalized in writing. An express agency is one that was formalized--before the fact--either verbally or in writing. The traditional rule (in the "Statute of Frauds") states that a listing agreement cannot be enforced in court unless it is in writing and signed by the party to be charged. Test-Taking Tip: Because it is frequently tested, it is worth reviewing the other promises, agreements, and contracts that must be in writing to satisfy the Statute of Frauds.

B is incorrect. A general agency usually gives the agent a limited ability to bind the principal (e.g., a property manager has the ability to find and sign qualified tenants on behalf of the property owner). This is typically used in an ongoing business, where the agent has multiple duties to perform. In contrast, the special agent acting under the authority of the exclusive right-to-sell listing agreement typically only has the sole duty of finding a buyer. Special agency is an advisory position, and the agent traditionally lacks the authority to bind the principal (e.g., a listing agent can solicit offers, but lacks the power to accept an offer and bind the seller). C is incorrect. A universal agency gives the agent broad powers, including the authority to bind the principal. A "Power of Attorney" is an example of a document that might set up a universal agency. Test-Taking Tip: The agent created by a Power of Attorney document is called an "attorney-in-fact." This person does not need to be an attorney. D is incorrect. An implied agency is created through the actions of the two parties. Here, the test question states this listing agreement was created before the fact and is in writing, making it an express agency not an implied agency.
 

Although a salesperson likely refers to himself/herself as an agent, the salesperson is not an agent. The broker is the agent. The salesperson owes all of the fiduciary duties to the client (principal) that an agent owes, but most all of the agent's real estate related activities must be supervised by a broker.

A company dollar is what the brokerage firm has left after licensee commissions have been paid.

B is incorrect. A company dollar is what the brokerage firm has left after (not before) paying licensee commissions. C is incorrect. This answer choice describes the term "desk fee." D is incorrect. The term "company dollar" is not associated with the IRS 1031 tax-deferred exchange. Under Section 1031 of the United States Internal Revenue Code, capital gains taxes may be deferred for real estate used for business or investment purposes--if the parcel of realty is exchanged for another "like-kind" parcel. This allows property owners to defer paying federal capital gains taxes until the new parcel of real estate is sold. Note: In a 1031 exchange, "like-kind" doesn't mean identical. A like-kind parcel of real estate is one that is used for business or investment purposes, meaning an office building could be exchanged for an apartment building.
 

An advance fee given by the seller to cover advertising costs is considered trust funds. Most states have very strict rules governing the handling of trust funds. Generally the funds must be used only for their intended purpose; and an accounting of all expenditures must be provided to the principal. If the money is not used for its intended purpose, it must be returned to the principal.

In an exclusive agency listing agreement, if a buyer is found, the licensee will earn a commission, unless the seller finds the buyer. With the exclusive agency listing agreement, there is only one brokerage firm. Also, the licensee has a limited, clearly-defined period of time in which to find a buyer. Finally, the exclusive agency listing agreement is a bilateral contract. A bilateral contract is the exchange of a promise for a promise. The seller promises to pay the commission if the licensee finds a buyer. The licensee promises to use due diligence to find a buyer.

A is incorrect. Under the exclusive right-to-sell listing agreement, the licensee will earn a commission if a buyer is found during the term of the contract. It does not matter who finds the buyer. The exclusive right-to-sell is a bilateral contract. This type of listing agreement provides the maximum protection for the licensee. B is incorrect. This type of contract is by and between a licensee and a buyer. D is incorrect. The open listing agreement is a unilateral contract: A unilateral contract is the exchange of a promise for performance. The seller is promising to pay a commission to the one licensee who performs and finds a buyer. It is not exclusive, meaning there can be multiple licensees from multiple brokerage firms working to find a buyer. If the seller finds a buyer, none of the licensees will earn a commission. Finally, there does not need to be a specific termination date for an open listing.
 

An open listing gives any real estate licensee who has a listing agreement with the seller the right to a commission if he finds the buyer for the home. An open listing gives the seller the right to establish many listing agreements with many brokerage firms and pay a commission only to the firm that finds the buyer. Sellers might be under the misguided impression that this type of listing gives them an advantage. However, in most cases, the listing agents in an open listing are not apt to market the property as aggressively if there is a possibility that another firm could find the buyer. Furthermore, most Multiple Listing Services (MLS) specifically prohibit the publication of open listings in the MLS listings, so all marketing of the property must be done through other less effective means.

The agreement described in this fact pattern is an option: An option is a unilateral contract. An option is a contractual agreement between an owner (the "optionor") and a prospective buyer (the "optionee"). The owner agrees not to sell the property to anyone else during the period of time specified in the option. This is a unilateral contract, meaning it is the exchange of a promise for performance. Here, the owner is promising not to sell the property to anyone else until the prospective buyer decides either to buy (i.e., perform) or not buy. Whatever the prospective buyer decides, the owner of the property will keep the nonrefundable option fee. During this option term, if the prospective buyer decides to exercise the option, the seller will sell the property to the prospective buyer at a price both parties have agreed to in the option agreement. Note: Prospective tenants could also enter into an option with owners regarding prospective leasehold property. If the prospective tenant decides not to exercise the option, the owner would keep the nonrefundable option fee.
A is incorrect. A bilateral contract is the exchange of a promise for a promise. Here, the prospective buyer is not making a promise, and has the freedom to walk away, if deciding against the purchase of the property. C is incorrect. During an option term, the buyer is deciding whether or not to purchase the property. The owner and the prospective buyer are not yet parties to a purchase contract. If the prospective buyer decides to purchase the property, a bilateral purchase contract will be necessary. D is incorrect. An unenforceable contract prevents the victim of a breach of contract from going to court and suing. Here are some common examples of an unenforceable contract: a verbal contract when a writing is required (Statute of Frauds issue); a contract with an unlawful purpose; a contract past the Statute of Limitations; etc. There is nothing in the fact pattern to suggest that this option contract would be unenforceable in a court of law.
 

Contracts for the sale or purchase of real estate are unenforceable in a court of law unless they are in writing and signed by the parties to be charged. The purpose of the statute of frauds is to prevent fraud by a person seeking to enforce a contract that was never made. The statute was not designed to prevent oral contracts. One exception to this rule is oral leases for a period not exceeding one year. Such leases are enforceable if the intent of the parties can be established in court.

These facts reflect improper delivery of the deed. In order for title to transfer, there must be a valid deed as well as delivery and acceptance of the deed. A deed is delivered when there is intent to convey the property. Here, there was not even an intent to convey the property during the lifetime of the grantor. If the mother did not want to convey her property until after she passed, she should have used a will, a trust, or, perhaps, a deed creating a life estate in herself with a remainder interest in the son.

A is incorrect. There is nothing in the fact pattern to suggest a lack of capacity. Issues relating to lack of capacity might have to do with: an unemancipated minor attempting to sign a deed, a mentally-incompetent grantor, or a grantor who executed a deed while drunk or drugged. C is incorrect. Concurrent ownership occurs when multiple people own the same parcel of real estate together. The fact pattern states that the surgeon was the sole owner of the property when she executed the deed, and wanted her son to be the sole owner of the property after she passed. D is incorrect. The test question states that the surgeon properly executed a legal deed.
 

The intent to transfer is manifested by delivery of the deed. Deeds become valid upon delivery, acceptance and notification to the deliverer of the acceptance. In most states, delivery happens when the grantor (seller) signs the deed. Notification to the deliverer that the deed has been accepted occurs when the deed is recorded. The method of legal acceptance of a deed varies by state.

FHA mortgage insurance premiums (MIPs) can be paid at closing or included into the loan amount and paid monthly. FHA mortgage default insurance protects lenders in the event of borrower default.

A is incorrect. FHA is not a direct lender. B is incorrect. FHA is not a joint lender, but provides borrower-paid insurance to protect lenders in the event the borrower defaults on the loan. However, for FHA-fully-insured financing, the loan must be through an institutional lender approved by the federal Housing and Urban Development (HUD). C is incorrect. FHA fully-insured loans have a higher LTV ratio than conventional loans. In fact, borrowers with an FHA loan may only need to make a 3.5% down payment.

Test-Taking Tip: Examiners occasionally will try to confuse students by writing complicated test questions like: "All of the following are incorrect, except." When faced with this type of test question, simplify the confusing language into a "True/False" question. For example, a simpler way of phrasing this question is: "Which answer choice is true?"
 

A three-party security instrument that hypothecates real estate is called a Deed of Trust. The Deed of Trust (aka a "Trust Deed") is one of the documents the borrower signs when getting a loan using real estate as collateral. A Deed of Trust creates a voluntary lien on the real estate of the borrower. The three parties to this legal instrument are the lender (beneficiary), the borrower (trustor) and the trustee (the third party to whom the borrower conveys bare legal title for the lifetime of the loan).

Test-Taking Tip: Make sure you memorize the information in your study materials related to Trust Deeds. Even if Deeds of Trust are uncommon in your state, you are very likely to be tested on this subject.

Note: During the lifetime of the loan, the trustee under a Trust Deed will hold bare legal title to the property. When the loan is paid in full, the trustee must reconvey bare legal title back to the borrower, and does so using a document called a "Deed of Reconveyance." However, if the borrower defaults on the loan (e.g., stops making loan payments, permits the real estate to fall into disrepair, etc.), the trustee typically administers the foreclosure and conveys the property to the high bidder at the foreclosure sale using a "Trustee's Deed upon Sale."
A is incorrect. A mortgagor is the name of the borrower in a two-party security instrument called a Mortgage. B is incorrect. A mortgagee is the name of a lender in a Mortgage. Test-Taking Tip: Like the Trust Deed, the mortgage also creates a voluntary lien on the property. However, in contrast to the Trust Deed, it is only a lien: No portion of title is conveyed by a mortgage. D is incorrect. The trustor is the name of the borrower in a Deed of Trust.
Test-Taking Tip: Make sure you spend some study time going through the glossary in your licensing materials. Examiners frequently test knowledge of technical words and terms like "hypothecate" (to pledge real estate without giving up possession).
 

Regulation Z requires that lenders furnish an applicant for a real estate loan with a statement that discloses the finance charges associated with a loan. The Truth in Lending Disclosure Statement shows the annual percentage, which is the borrower's cost of credit as an annual rate; and the total amount the borrower will repay to the lender in comparison with the amount financed.

Discrimination on the basis of race in the purchase or leasing of real estate is always illegal--even when the goal is racial diversity. Test-Taking Tip: Race is the only protected class in the Civil Rights Act of 1866. Race is one of multiple protected classes in the Civil Rights Act of 1968, as amended.

B is incorrect. Lead-based paint warnings are required--for both sales and rentals--if construction began prior to January 1, 1978. Unless there is actual knowledge of lead-based paint on the premises, a warning is unnecessary for an improvement constructed in 1987.

Test-Taking Tip: Make sure you know what is considered "target housing" for lead-based paint warnings (i.e., pretty much any residential property constructed before 1978). C is incorrect. If a complex complies with federal rules related to senior citizen housing, owners and property managers are legally permitted to exclude families with minor children. Note: Per federal rules, a senior is someone who is 55-years-old or older. D is incorrect. One of the property manager's most important duties is to find well-qualified tenants who are financially able to rent the leasehold property.


 

A property manager is obligated to stay informed about market rents in the area; and track vacancies in the building being managed. However, the property manager has no obligation to the principal to stay informed on market value of the building. Fairness and honesty are always a part of a property manager's responsibilities as a party of the duty of agency.

The landlord breached the implied Warranty of Habitability. For many jurisdictions across the United States, this promise of a habitable living environment is implied by law in residential leases. It need not be discussed verbally or included in writing in the lease. The basic living and safety standards in this implied warranty include necessities such as heat, plumbing, electrical systems, and water. By not responding in a timely manner to the tenant's repeated calls for help, the landlord was in breach of the implied Warranty of Habitability. Therefore, the tenant's abandonment of the leasehold property--and subsequent refusal to pay rent--would most likely be found by a court to be justified, relieving the tenant from any further obligations under the lease. Note: A failure on the part of the landlord to make a residential rental property habitable is referred to as "constructive eviction." This is not physical or legal eviction, but rather a failure on the part of the landlord that significantly affects the tenant's possession, enjoyment, or use of the leasehold property.

A is incorrect. This answer choice states the general rule. But, a breach of the implied Warranty of Habitability may relieve the residential tenant of any further contractual obligations, including payment of rent. B is incorrect. In most jurisdictions, the landlord is responsible for keeping necessities such as heat, plumbing, water, and electrical systems in good repair. C is incorrect. Another promise many jurisdictions imply into residential leases is the Covenant of Quiet Enjoyment, an implied promise that no one claiming superior title will disturb the tenant's possession of the leasehold property. However, there is one important exception to the Covenant of Quiet Enjoyment: If there is an emergency situation on the leasehold property, the landlord has the right to enter the property--unannounced--to repair the emergency.

Test-Taking Tip: Note the use of the terms "Lessor/Lessee," rather than "Landlord/Tenant" throughout this test question. Make sure you memorize all the OR/EE terms in your study materials (e.g., Optionor/Optionee, Mortgagor/Mortgagee, Trustor/Trustee, Grantor/Grantee, Vendor/Vendee, Lessor/Lessee, etc.). The examinees will frequently use these somewhat technical terms in test questions rather than the words used in everyday speech.
 

The landlord or property owner is the lessor; or the person giving the lease rights. The tenant is the lessee; or the person receiving the lease rights.

In comparison to the single-family residence being appraised (frequently referred to as the "subject property"), the second comparable is missing a bathroom. The value of a bathroom must be added to the sales price of the second comparable so that it more accurately reflects the market value of the subject property.

A is incorrect. Although appraisers look for comparables that are as close as possible to the subject property, the comparables do not have to have the exact same number of bedrooms and bathrooms. The appraiser will adjust the sales prices of the comparables to account for differences between a recently-sold comparable and the subject property. It is the job of the appraiser to know, for example, what a bedroom or a bathroom is worth in a particular neighborhood. B is incorrect. Adjustments are made to the recent sales prices of the comparables, not to the subject property. D is incorrect. The third comparable has only 3 bedrooms, while the subject property has 4 bedrooms. The value of a bedroom must be added to--not subtracted from--the sales price of the third comparable.

Note: The market data approach is also called the "sales comparison approach."
 

The principle of supply and demand is the oldest principle of economics; and it is also the most predictable principle. When demand for homes increase because of national economic influences (such as lower interest rates), values tend to increase. Also, when demand increases because of local changes, such as a new business coming to the area; or an influx of new residents, values will increase.

In order to maintain a Gross Rent Multiplier of 200, Jordan's offer for this additional property should be $500,000. The Gross Rent Multiplier (aka the "Gross Income Multiplier") is a simpler, less accurate alternative to capitalization takes into account the income generated by a parcel of real estate, but not the expenses charged to the property. This alternative to capitalization is most widely used with single-family residences. There are the three mathematical relationships related to the Gross Rent Multiplier you should know for your exam:

• Gross Rent Multiplier X Rent = Value (e.g., 200 GRM X $2,500 rent = $500,000 Value)
• Value ÷ Rent = Gross Rent Multiplier (e.g., $500,000 Value ÷ $2,500 Rent = 200 GRM)
• Value ÷ Gross Rent Multiplier = Rent (e.g., $500,000 Value ÷ 200 GRM = $2,500 Rent)

Here, the test question states that the current monthly rent paid for the property is $2,500. Jordan's other properties have a Gross Rent Multiplier of 200. In order to maintain this Gross Rent Multiplier, Jordan would multiply the Gross Rent Multiplier (200) by the Rent ($2,500), and make an offer of $500,000 on the property.

A is incorrect. This offer would result in a Gross Rent Multiplier of 160 ($400,000 ÷ $2,500 = 160 GRM). If Jordan's 4 other properties in the neighborhood have a Gross Rent Multiplier of 200, it is unlikely that the seller will accept this low an offer. C and D are incorrect. These offers would result in a Gross Rent Multiplier that would be too high for this particular neighborhood and Jordan's 4 other properties (e.g., $600,000 ÷ $2,500 = 240 and $700,000 ÷ $2,500 = 280).
 

Investing in real estate is the act of giving up money that could be spent elsewhere in exchange for the potential for profit in the future. The likelihood of a profit is called the risk. As a rule, the greater the risk, the lower the investment. Investment in vacant land is a low-risk investment because vacant land does not tend to depreciate as much or as fast as improved land; and the cost to purchase vacant land is usually lower than the cost to purchase improved land.

With regard to federal lead-based paint disclosure rules, "target housing" includes residential dwellings built before January 1, 1978. This is the difference that one day can make. If construction started on December 31, 1977, then the residential dwelling is target housing, and lead-based paint warnings must be given to prospective buyers and tenants. If construction started on January 1, 1978, then the dwelling is not target housing, and the lead-based paint disclosure requirements do not apply. However, even if construction of the house commenced on or after January 1, 1978, a seller or landlord with actual knowledge of lead-based paint on the property is under a duty to disclose this to prospective purchasers and tenants.

A is incorrect. Answer choice "A" misstates the rule. If construction started on January 1, 1978 then the house would not be considered target housing, and, absent actual knowledge of lead-based paint on the property, there would be no federal lead-based paint disclosure requirements. B is incorrect. The seller or landlord is responsible for compliance with lead-based paint disclosures: Compliance is not waived if there is no licensee involved in the transaction. A licensee, however, if involved with the transaction is responsible for advising the client as to proper disclosure and compliance. D is incorrect. Sellers and licensees are under no obligation to order an inspection to have the house tested for lead-based paint, or to pay for repairs if lead-based paint is discovered. Prospective buyers must be given a 10-day window to have the property inspected for lead-based paint, but even prospective buyers are free to waive testing.
 

Landfills and the toxins and chemical by-products of the refuse are a major cause of groundwater contamination because rainwater and snowmelt can filter through the refuse and dissolve a wide range of water soluble pollutants, which then seeps into the ground. The process of capping mitigates this process because the clay-like soil forms a barrier so that most of the water stays above the level of the refuse and less water filters through the refuse.

The seller will be reimbursed for the prepaid property taxes for those four months of the remaining tax year when the Buyer will own the property.

The other answer choices are all considered debits to the seller. Test-Taking Tip: A good way to remember this is that, for the Settlement Officer, a "credit" increases what a party can take from the closing, while a "debit" decreases what a party takes from the closing. In this test question, the prepaid property taxes will be a credit to the seller and a debit to the buyer. However, debits and credits on the closing statement are not always balanced equally between the two parties. Here, for example, the seller must pay off the outstanding mortgage lien, the mechanic's lien, and the brokerage fee, but these are not considered credits to the buyer.

The HUD -1 Settlement Statement is a standard form in used to itemize services and fees charged to the borrower by the lender or broker when applying for a loan. A final HUD -1 statement must be given to buyers one day prior to the signing of the documents. The HUD -1 settlement statement also contains a good faith estimate (GFE) which specifies the estimated loan costs.

In the government survey system (aka "rectangular survey system"), an entire section of land is one square mile. One square mile contains 640 acres. One quarter of a section has 160 acres (640 ÷ 4 = 160). A quarter of a quarter section has 40 acres (160 ÷ 4 = 40). Here, the legal description states that the purchased property is a quarter of a quarter of a section, thus, 40 acres. If the land is $3,542.45 per acre and the land purchased is 40 acres, then the purchase price is $141,698.00 ($3,542.45 X 40 = $141,698.00).
A is incorrect. This would be the correct purchase price for a 30 acre parcel. C is incorrect. This would be the correct purchase price for a 60 acre parcel. D is incorrect. This would be the correct price for a 160 acre parcel.