Alabama Real Estate Exam State Test Outline 2011

Alabama Real Estate Exam

State Test Outline

2011 Steve McTyeire

[email protected]

Test Questions Questions

• Agency Relationships & Contracts 28• Real Property Ownership 14• Finance 15• Real Property 14• Market Regulations 8• Property Management 8• Real Estate Calculations 13

• Total General Knowledge 100

• Alabama Law 40• Total Questions on Test 140

1. Agency Relationships & Contracts

A. Agency Relationships1. Creating Agency2. Types of Agency (including implied agency)3. Rights, Duties and Obligations of the Parties4. Termination and Remedies for Non-Performance5. Disclosure (related to representation)

1. Agency Relationships & Contracts

B. General Legal Principles, Theory, and Concept about Contracts

1. Unilateral / Bilateral2. Validity3. Void and Voidable4. Notice of Delivery / Acceptance5. Executory / Executed6. Enforceability7. Addenda to Contracts

1. Agency Relationships & Contracts

C. Purchase Contracts (contracts between seller and buyer)

1. General Principles and Legal Concepts2. Purchase Contract (contract of sale, purchase and sale agreement)3. Options (contractual right to buy)4. Basic Provisions / Purpose / Elements

1. Agency Relationships & Contracts

C. Purchase Contracts (contracts between seller and buyer)

5. Conditions for Termination / Breach of Contract6. Offer and Acceptance (counter offers, multiple offers, negotiations, earnest money)7. Contingencies8. Duties and Obligations of the Parties

1. Agency Relationships & Contracts

D. Services/Listing Buyer Contracts (contracts between licensee and seller or buyer)

1. General Principles and Legal Concepts2. Basic Provisions / purpose / Elements3. Duties and Obligations of the Parties4. Conditions for Termination/Breach/of Contract5. Remuneration / Consideration / Fees6. Types of service / Listing Contracts

1. Agency Relationships & Contracts

E. Employment agreements between Broker and other Licensees (including supervision)

EmployerIndependent Contractor

2. Real Property Ownership/Interest

A. Freehold Estates (rights of ownership)

B. Types of ownership (estates in land)1. Joint Tenancy 2. Tenancy in Common3. Condominiums

2. Real Property Ownership/Interest

C. Leasehold Interest1. Basic Concepts and Terminology 2. Types of Leases3. Basic Elements and Provisions of Leases4. Rights and Duties of the Parties5. Remedies for Default / Non-Performance

2. Real Property Ownership/Interest

D. Forms of Business Ownership1. Sole Proprietorship 2. General or Limited Partnership3. LLC

2. Real Property Ownership/Interest

E. Private Restrictions on Real Property, Land Use and Matters Affecting Ownership

1. Liensa. Voluntaryb. Involuntaryc. Priority

2. Real Property Ownership/Interest

E. Private Restrictions on Real Property, Land Use and matters Affecting Ownership

2. Easements / Rights of Way / Licenses3. Preexisting Leases or Other Agreements4. Encroachments5. Deed Conditions, Covenants and Restrictions6. Property Owner Association Agreements

2. Real Property Ownership/Interest

F. Governments Powers and Control of Land Use1. Americans With Disabilities Act (ADA)2. Land Use Restrictions and Regulations (zoning)4. Police Powers5. Property Taxation6. Subdivision Regulations (e.g. Condominium, Cooperatives, Planned Unit Development)

3. Finance

A Basic Concept and Terminology1. Equity2. Loan-to-Value Ratio3. Term4. Principal and Interest5. Direct and Indirect Costs (points, discounts)6. Return on Investment / Rate of Return

3. Finance

B. Types of Financing 1. Amortized2. Interest Only3. ARM4. Construction Loan5. Home Equity

3. Finance

C. Methods of Financing1. Government Programs (e.g., FHA, VA)2. Conventional3. Owner-financed4. Land Contract

3. Finance

D. Financing Instruments Mortgages, Trust Deeds, Promissory Notes1. Basic Elements and Provisions

of Financing Instruments2. Legal Principles3. Non-Performance

3. Finance

E Government Oversight1. RESPA2. Regulation Z3. Truth in Lending Act4. Antitrust5. Mortgage Fraud6. Equal Credit Opportunity Act

3. Finance

F Lending Process1. Pre-approval and Pre-qualification (debt ratios, credit scoring, and history)2. Parties to the Lending Process (loan originator, underwriter, mortgage broker)

4. Real Property

A. Methods of Legal Description of Land1. Metes and Bounds2. Rectangular Survey3. Lot and Block

4. Real Property

B. Methods of Measurements 1. Structures (space and volume)2. Livable Area3. Land Measurement

4. Real Property

C. Property Valuation1. Basic Concepts and Terminology2. Influences and Characteristics Affecting Value3. Comparative Market Analysis (CMA)performed by a real estate licensee4. Broker Price Opinion (BPO)5. Real PropertyFixtures / Personal Property Chattel

4. Real Property

D Methods of Valuation by Appraiser1. Sales Comparison Approach (Market Data)2. Cost Approach3. Income Analysis Approach4. Appraisal Process / Procedure

4. Real Property

E. Conveyance of Real Property

1. Definition of Clear Title (Marketable)2. Matters Affecting Title3. Recordation4. Title Insurance

4. Real Property

E. Conveyance of Real Property

5. Deeds6. Will7. Court Ordered Sale (foreclosure)8. Adverse Possession9. Settlement Procedures (closing the transaction)

5. Marketing RegulationsPurchase and Rental

A. Property Advertising Disclosures Including Fair Housing

1. Environmental Concern Lead Based Paint, Radon

2. Property Condition

5. Marketing RegulationsPurchase and Rental

B. Licensee Advertising1. Antitrust2. Do-Not-Call List3. CAN-SPAM Act4. Fair Housing – Blockbusting, Steering

6. Property Management

A. General Principles of Property Mgt. AgreementsB. Basic Provisions / Purpose / Elements of

Property Management AgreementsC. Types of ContractsD. Duties and Obligations of the PartiesE. Market Analysis and Tenants AcquisitionF. Accounts and Disbursements G. Property Maintenance and ImprovementsH. Evictions

7. Real Estate Calculations

A. Compensation, Commission, and FeesB. Valuation / Market Sale Price and YieldsC. Net to Seller, Cost to Buyer (credits & debits)D. Tax and Other ProrationsE. Amortization

7. Real Estate Calculations

F. PointsG. Prepayment Penalties H. Loan-to-Value RatiosI. Measurements (square footage, acreage, volume)J. Property Management / Investment (rate of return)

• Let’s get started

Agency Relationships &Contracts 28% of General Knowledge Test

A. Agency Relationships1. Creating Agency

Must be in WritingPurposeParties

A. Agency Relationships2. Types of Agency (including implied agency)

Transaction Broker – Assist the TransactionRelationship starts here working with Customer

Single Agent – Represents one party AdvisesWorks For Client

Dual Agent – Limited Consensual Agent for both sidesSub Agent – Pre RECAD – work under listing broker

• Responsibilities of Licensee and Listing Firm• Listing May be Agency or Transaction Broker• Agency – Listing – Client –Principle – Fiduciary • Works For Client

• COLD AC– Duties

• Confidentiality – Any information gained in confidence• Obedience – Perform all lawful acts• Loyalty – Put Clients interest above agent’s• Disclosure of Material Facts• Accountability of all funds• Care – Reasonable

• Alabama – Representation Notice – RECAD– Real Estate Consumer Agency Disclosure

• Single Agent – Agency – must have signed agreement– Works FOR one party

• Dual Agent (limited consensual) - Agency– Works FOR both parties – must have signed agreement

• Transaction Broker (or their agent) – no written agreement– Works WITH one or both parties – Non Agency

• Sub-Agent – works on behalf of listing broker– Not used any longer –

• Agency agreement must be in writing – Express• No Implied Agency in Alabama

– Transaction Broker is default (always starts as) relationship

• Types of agents

– Universal• Power of Attorney - May sign deed

– Can do anything permitted in name of principle

– General• Property Manager

– Can do specific allowed things like have building painted

– Specific• Real Estate Agent

– Limited authority to do things like show home to buyer» Can not sign or initial contract for principle

– Types of licensee

• Company– Must have qualifying broker

• Broker QB– One per company

• Associate Broker -- Any broker other than QB– Passed broker test, but remains under another broker

• Salesperson

• Disclosure – – Alabama is “Caveat Emptor” - Buyer Beware

• No required seller disclosure statement in Alabama

– Must disclose Known latent defects • Latent – hidden, not easily discovered• Patent - easily discovered

– Includes health or safety defects– If Agency- must disclose everything known by agent– No duty to discover

• Caveat Emptor does not apply to:

• HAND– Health & Safety– Assumption of Duty– New Construction– Direct Question

• Misrepresentation – Material Fact not disclosed

• Fraud if:– You made statement, or not– Buyer, Seller relied on information– Someone was harmed

• Implied Agency is Fraud– Leading customer to believe they are represented– Buyer or Seller relied on this– They were harmed

• Real Property– Land from center of earth to reasonable height above

– Includes mineral and water rights• These may be sold separately

– Includes appurtenances – runs with the land• All rights, privileges and improvements that transfer with

land• May be tangible (can touch) easement• Or non-tangible - right to use

• Personal Property

– Things that are tangible and moveable, • Not real property• Chattels ( also called personalty)

– Title to personal property is transferred by “bill of sale”

• Fructus Industriales– Annual crops are considered personal property – emblements– Must allow harvesting even after lease ends

• Fructus Naturales– Uncultivated crops and trees are considered real property

• Trade Fixtures – Necessary for business operation – personal property

• Must be removed prior to lease termination • Any damage must be repaired

• Listing Agreement– May be Agency or Non Agency– Must have expiration Date

• No Automatic renewals– Must leave copy with principle– Must retain copy for 3 years– Net Sheet – not required, but recommended

– Must be in writing to enforce commission• Only broker may sue for commission

– Deed has names of all owners• Deed does not prove ownership

• Listing Agreement– Owner will sell at price and terms– Broker gets paid for bringing buyer

• Must be signed by all owners • Must be in writing to be enforceable • Must have expiration

– No automatic renewal • Must leave copy with owner.

• Is unilateral personal service (employment) agreement• Commission is negotiable

• Forms of Ownership in Real Estate

• Easy as 1, 2, 3

• 1 - One Owner (severalty) severed from others– Married person may hold property in severalty

• 2 - persons may hold title together as:– Joint Tenants with right of survivorship

• Most likely husband and wife• PITT – Title passes to other holder upon death of other owner

– Tenants in common – interest may not be equal• Upon death title passes to heirs

• 3 – Trust 3 parties• Trustor (creates trust)• Trustee (holder of title)• Beneficiary (benefits from trust)

• Issues related to conveyance of real property

– Seller responsible for delivering marketable title• Deliver property as contracted • Title Insurance• Deed must be delivered during Grantor’s lifetime• Acknowledgement – Notarize to record- constructive notice

– Buyer must pay purchase price

Fair Housing PosterMust be displayed In Office

• Fair Housing Protected Classes

• FRESH CORN

• Familial Status – family with children• Race – Civil Rights 1866• Equal Opportunity for everyone• Sex• Handicap – includes AIDS

• Color• O E&O insurance won’t cover violation• Religion• Nationality

• Comparative market analysis Sales comparison of recent sales of similar homes

• Not as detailed as appraisal

• Income Approach– Investor requires a return on investment (ROI)

•  • “T” Formula

• ________Results________ $10,000 Commission Paid• Base Rate $100,000 Sales Price .10 Rate• Rate is expressed as a decimal

• Multiply bottom #s or divide top # by one bottom # • • Base X Rate or Results / Base or Results / Rate

• Results / Base = Rate 10,000 / 100,000 = .10• Results / Rate = Base 10,000 / .10 = 100,000• Results = Base X Rate 10,000 = 100,000 X .10

• Capitalization Rate = Return on investment “T” Formula• Results• Base Rate• Investor demands a 10% Return; could be 15% or any number• This as the Rate in the “T” Formula - Must change to decimal .10

– Rate always goes on bottom right• You may not get the net income, but be given the numbers to calculate it• The way to calculate net income is GIVEN • GI $100,000 Gross Income: 100 apartments renting for $1000 per month• V - $5,000Vacancy is 5% (of Gross Income) • E - $30,000 Expenses are 30% (of Gross Income) • N = $65,000 Net Income (Before Taxes)

• Net income for one month, so multiply by 12 to get annual income = $780,000• $780,000 is the Result,(top #) • you know the Rate (bottom right #) is .10 • you want the Base (bottom left)• Divide the Net Income (Results) of $780,000 by the Rate of .10

• _____________$780,000___________• $7,800,000 .10

– Capitalization Rate in this example is 10%

• This apartment has a market value of $7,800,000 – at a capitalization Rate of 10%

• What if it sold for $5,000,000?• This means that the market (investors) require a higher rate of return

of 15.6% Calculator said 0.156

• With the “T” Formula, if you get an answer that look wrong, swap the Base # with the Result # and recalculate

• 7,800,000 / 780,000 would give a rate of return of 1000% and you would know that is wrong

• Remember to move the decimal point two places to the right to get the percent .10 = 10%

• Appraisal is an estimate of market value• Appraisers are licensed - 2500 hour training• Appraisal necessary when:

– Federally related transaction– Residential property above $250,000

• Appraisers use verifiable information • Allows lender to get independent opinion of value

– Appraisal fee not based on value of property

• Non- ownership interest– Lease

• Interest of tenant• Possession

– Quiet enjoyment

– Estate for life• Reversion interest goes back to grantor of estate• Remainder man interest goes to another person

– Liens

– Easements• Utility (looks gross)• Personal

• Relationship and responsibilities of the licensee

• Agency – COLD AC

• Non-Agency– HARD?

• Consumer• Customer• Client

• Rights of Ownership (Bundle)– Fee Simple has entire bundle

• UPEED

• Use• Possession• Enjoyment• Exclusion• Disposition

• Types of ownership Easy as 1,2, 3 people

• 1 Severalty – One owner

• 2 Joint Tenancy (Right of survivorship)• Husband and wife smoking a joint; one dies of cancer;

other get property Tenants in Common

• Common people in Condominium pool

• 3 Trust – Trustor – set up trust – Trustee - manages trust– Beneficiary - gets benefit of trust

• Finance options

– VA 100% Ratios total 41% for Mtg. and other LTD• Guaranteed by government• Funding Fee (mortgage insurance) 2-3%

– FHA down payment of about 3 ½ % - Ratios 28%, 36%• Up front mortgage premium 1% (just changed)• Insured (mortgage insurance premium of ½%) added to rate

– Conventional 80% LTV Ratios 28% mtg. 36% total• Not insured

• Special Financing

– Builder• Buy downs interest rate short or long term• Closing Cost (are really added to price)

– Rural• Bond

– Owner, Land Contract, Contract for Deed• Balloon after about 5 years, amortized over 30

• Pre Approved– Talked with mortgage banker or broker

• Meet unverified ratios

• Pre Qualified– Information given to mortgagee verified

• Mortgagor – gives mortgage (securitized promise to pay)

• Mortgagee – gets this specific lien on property

• Required Disclosure Forms:

• RECAD– Real Estate Consumer Agency Disclosure

• Lead Based Paint if build before 1978• Net sheet for your consumer at offer• Good Faith Estimate (GFE From Lender)• HUD statement at closing

• Repeat after me:

• I am not an attorney or accountant, • And will not give legal or tax advise.

• Home Insurance (Hazard)– Covers loss from fire and other perils

• Owners• Tenants

• Home Warranty– Covers breakdown of home systems such as A/C

• Used Homes – New Construction has warranty

• Home Inspection– Surface look at home

• Title Insurance– Covers a defect on the title

• FHA Addendum – Buyer needs to know the difference

• RECAD not required for property management

• Disclosure of material facts to lessee

• Pre 1978 requires lead based paint form & pamphlet

• Health & Safety

• Obtaining tenants

• Showing property

• Negotiating lease– Price & Terms– Responsibilities of owner & tenant– Pet policy

• Application process– Credit– Background

• Owner’s decision to accept tenant

• Lease is two contracts

• Transfer of possession– One stick in the bundle of property rights– Owner has reversionary right

• Tenant stays beyond lease expiration creates:– Tenancy at Sufferance

• If tenant and landlord agree to continue tenancy:– Creates Holdover Tenancy as Period to Period

• Extending credit– Must follow Fair Credit Act

• Similar to Fair Housing– Includes age & receipt of public assistance

• Trust Accounts

– Separate from Operating Account– No Comingle - mix trust money with company money– No Conversion - pay company bills with trust money– FDIC insured bank in Alabama– AREC audited, must be reconciled each month– Broker must be on account

Date Cash In Reason Cash Out Reason Balance1/20/20xx 900.00 Deposit 123 Main 900.00

100.00 Pet deposit 1000.00

4/1/20xx 900.00 Forfited deposit 123 Main 100.00100.00 damage from pet 123 Main 0.00

Rental Security Deposits

Date Debit Credit EscrowSecurity Deposit 900.00 900.00Rent Pro-rated 300.00

Rent 900.00Rental Fee

Management fee 120.00Owner's Proceeds 1080.00

New Location Realty 1951 Hoover Ct #201 Hoover, AL 205-807-1745Rental Account

123 Main

• Owner’s return on investment ROI– Determines price investor will pay for cash flow

• Gross income $900 X 12 months = $10,800• Expenses 30% = $3,240• Net income = $7,560

• If investor requires a 10% ROI• $7,560 / .10 = $75,600 investor will pay for a 10% return

• What if investor requires a 15% return?• $7,560 / .15 = $50,400

• Actual Eviction– When Tenant breaches lease

• Non payment• Breach

– Landlord must file suit for possession• Serve notice• Court

• Landlord may not change locks or turn off utilities

• Constructive Eviction– When landlord breaches lease– Time to comply

• Alabama Landlord and Tenant Act

Clauses in Management Agreement

Clause in Lease