Crash course Flashcards

Question

Advantages of real estate investment

Answer 1

Most real estate values tend to keep pace with the rate of inflation tax advantages

Answer 2

not a liquid asset it is difficult to invest in real estate without some degree of expert advice Rarely can a real estate investor sit idly by and watch the invested money grow high degree of risk

Answer 3

labor force, construction costs, government controls, monetary or financial policies

Answer 4

The Federal Reserve Board (the Fed)

Answer 5

the Consumer Financial Protection Bureau (CFPB)

Answer 6

watching out for American consumers in the market for consumer financial products and services.

Answer 7

population, demographics, employment and wage levels

Answer 8

business cycles

Answer 9

expansion, recession, depression, revival

Answer 10

usually means that certain basic required services necessary to utilize it are available, such as electricity, telephone, street access, or water access.

Answer 11

livery of seisin

Answer 12

usually refers to land that has a structure on it, for example a house

Answer 13

building's foundation supports

Answer 14

are granted to owners of land located along the course of a river or stream. Such an owner has the unrestricted right to use the water, provided such use does not harm owners upstream or downstream by interrupting or altering the flow of the water or by contaminating it.

Answer 15

the land under the water to the exact center of the waterway.

Answer 16

only to the banks of the river in North Carolina

Answer 17

public highways

Answer 18

of owners whose land borders oceans and large, navigable lakes that have a tide. enjoy unrestricted use of navigable waters but own the land adjacent to the water only up to the mean high-water mark. All land below this point is owned by the government. The strip of land between high and low tide lines, called the foreshore, belongs to the state of North Carolina

Answer 19

The strip of land between high and low tide lines, called the foreshore, belongs to the state of North Carolina

Answer 20

Prior appropriation doctrine states that water rights are determined by priority of beneficial use. This means that the first person to use water or divert water for a beneficial use or purpose can acquire individual rights to the water. Thus property owners may have land that borders water but no rights to use that water.

Answer 21

a gradual increase in land resulting from the deposit of soil by the water

Answer 22

If water gradually recedes or disappears permanently, new land is acquired

Answer 23

the gradual wearing away of land caused by flowing water or other natural forces, may cause an owner to lose land

Answer 24

The owner of real property has the right to lateral support, or the right to have adjacent property support the natural boundaries of the land. Therefore, construction or excavation on a neighboring property should not cause the soil on the owner's property to subside.

Answer 25

As discussed previously, occasionally the landowner severs the subsurface rights from the land and sells them. In such a situation, the property owner is entitled to subjacent support for the surface of the property from the owner of the subsurface rights. As an example, any underground mining projects must assure continued support of the land's surface.

Answer 26

(fructus industriales—fruits of industry) emblements considered personal property

Answer 27

(fructus naturales—fruits of nature) considered real property

Answer 28

annexation

Answer 29

Intention of the annexor: Did the person who installed the item intend it to remain permanently or be removable? (The courts look at objective evidence of the party's intent, not the party's subjective intent. In other words, the courts look at the facts surrounding the situation and determine what a reasonable person would have intended by them.) Relationship of the annexor: Is the person making the attachment an owner or a tenant? It is presumed that an owner intends a permanent attachment (the item becomes a fixture), while a tenant intends a temporary attachment (the item remains personal property). The greater the legal relationship the annexor has to the real property, the greater the likelihood the item will be declared a fixture. Method of annexation: How permanently was the item attached? Can it be removed without causing damage? To what degree has there been customization of the space around the item? For example, built-in refrigerators and microwave ovens are often surrounded by cabinetry, making them more likely to be considered a fixture. Adaptation to real estate: Has either the item or the property been tailored to facilitate working together? Has it been customized or built in to the property? For example, if a gas station owner sells his business, it would be the buyer's expectation that the underground gas storage tanks would remain with the property since the tanks are necessary for the business to function.

Answer 30

Seller's use, removal, or resale of fuel in any fuel tank is subject to seller's obligation to provide working, existing utilities through the earlier of closing or possession by buyer. Fuel tank(s), whether attached or buried, and including any contents that have not been used, removed or resold to the fuel provider as of settlement is considered a fixture.

Answer 31

Alarm and security systems (attached) for security, fire, smoke, carbon monoxide, or other toxins with all related access codes, sensors, cameras, dedicated monitors, hard drives, video recorders, power supplies, and cables; doorbells/chimes All stoves/ranges/ovens; built-in appliances; attached microwave oven; vent hood Antennas; satellite dishes and receivers Basketball goals and play equipment (permanently attached or in-ground) Ceiling and wall-attached fans; light fixtures (including existing bulbs) Fireplace insert; gas logs or starters; attached fireplace screens; wood or coal stoves Floor coverings (attached) Fuel tank(s), whether attached or buried, and including any contents that have not been used, removed or resold to the fuel provider as of settlement. Note: Seller's use, removal, or resale of fuel in any fuel tank is subject to seller's obligation to provide working, existing utilities through the earlier of closing or possession by buyer. Garage door openers with all controls Generators that are permanently wired Invisible fencing with power supply, controls, and receivers Landscape and outdoor trees and plants (except in movable containers); raised gardens; landscape and foundation lighting; outdoor sound systems; permanent irrigation systems and controls; rain barrels; landscape water features; address markers Mailboxes; mounted package and newspaper receptacles Mirrors attached to walls, ceilings, cabinets, or doors; all bathroom wall mirrors Storage shed; utility building Swimming pool (excluding inflatable); spa; hot tub Solar electric and solar water heating systems Sump-pumps, radon fans, and crawlspace ventilators; dehumidifiers that are permanently wired Surface-mounting brackets for television and speakers; recess-mounted speakers; mounted intercom systems Water supply equipment, including filters and conditioning and softener systems; re-circulating pumps; well pumps and tanks Window/door blinds and shades, curtain and drapery rods and brackets, door and window screens and combination doors, awnings and storm windows

Answer 32

There is a special class of fixtures in North Carolina called agricultural fixtures. While fixtures used in a farming operation would seem to fall into the category of trade fixtures, agricultural fixtures are considered real property rather than personal property. Therefore, in North Carolina, if a tenant farmer installed feeding troughs during the tenancy, they would be considered real property and could not be removed by the tenant at the end of the lease without special written agreement.

Answer 33

All brokers should be aware of the effect of the North Carolina Uniform Commercial Code (UCC) on fixtures. According to the UCC, if a homeowner purchases an item on credit (a dishwasher, for example) and gives the creditor a security agreement, that item remains personal property and may be removed by the creditor in the event of default.

Answer 34

A manufactured home is built according to the United States Department of Housing and Urban Development (HUD) construction standards

Answer 35

These units are constructed in factories off site according to state building codes and contain a state-inspection label with serial numbers certifying compliance. Once the modular home is assembled on the home site, it is immediately considered to be real property.

Answer 36

leasehold estates (those involving tenants' rights of possession)

Answer 37

(those involving rights of ownership)

Answer 38

fee simple estate (can pass by inheritance), defeasible fee estate (can pass by inheritance), pur autre vie estate (estate for the life of another) with remainder or reversion (can pass by inheritance), ordinary conventional life estate with remainder or reversion (does not pass by inheritance).

Answer 39

estate for years, estate from year to year, estate at will, estate at sufferance.

Answer 40

reversionary right

Answer 41

The former owners, their heirs, or their successors retain the right of reversion that automatically reacquires full ownership if the special condition ceases to exist.

Answer 42

future interests.

Answer 43

life tenant

Answer 44

elective share; marital life estate

Answer 45

In real estate, a reversionary interest refers to the future ownership interest or right to possess a property that will be realized or exercised at a later date. This interest typically arises from a condition or event specified in a legal agreement, such as a lease or a life estate.

Answer 46

A homestead is a legal life estate in real estate occupied as the family home. In effect, the home (or at least some part of it) is protected from most creditors during the occupant's lifetime. In states that have homestead exemption laws, a portion of the acreage or value of the property occupied as the family home is exempt from certain judgments for debts, such as charge accounts and personal loans. The homestead is not protected from real estate taxes billed against the property or a mortgage for the purchase or cost of improvements; that is, if the debt is secured by the property, the property cannot be exempt from a judgment on that debt. A family can have only one homestead at any given time. *Youtube this*

Answer 47

A wealthy person who gives the State of North Carolina ownership in land but stipulates that the property must always be used for recreational purposes has created a qualified fee estate. A qualified estate, also known as fee simple defeasible, requires a new owner to obey the restriction imposed on the estate by the previous owner.

Answer 48

means that title is held by one owner

Answer 49

Each co-owner of real estate has an absolute right to force a partition of the land by voluntary action and agreement, which will divide a co-owner's real estate according to his or her interests. When a division among co-owners cannot be agreed on voluntarily, the division can be ordered by a court in a suit for partition. The court may actually divide the land into pro rata parcels or, if this cannot be done, may order the property sold and the proceeds divided proportionately among the owners.

Answer 50

Some forms of ownership are called common interest community (hybrid) ownerships because they contain elements of both ownership in severalty and concurrent ownership. Owners of individual units may hold title to their unit in any legal way previously discussed (severalty, tenants in common, joint tenancy, or tenancy by the entireties).

Answer 51

The North Carolina Condominium Act of 1986 specifies that a condominium is created and established when the developer of the property executes and records a declaration of its creation in the county where the property is located. The declaration must include any covenants, conditions, or restrictions on the use of the property. The developer must file a plat map or plan of the condominium property, buildings, and any other improvements. The developer also must prepare a set of bylaws. The bylaws usually provide for... the creation of a unit owners' association giving a vote to each unit owner, the election of a board of managers from among the unit owners, the duties of the board of managers, the compensation of its members, their method of election and removal, whether a professional manager is to be engaged, the method of collecting the unit owners' association monthly dues from each member to cover the costs of management and maintenance of the common areas.

Answer 52

public offering statements; the purchase contract is signed The purchaser then has a seven-day rescission period, which begins after the purchase contract is signed. At any time during that seven-day period, the purchaser can cancel the sale and receive a full refund of any monies paid. On a resale unit (a sale of a condominium other than the original sale from the developer), a resale certificate detailing the monthly dues assessment and any other fees payable by a unit owner must be given to a purchaser prior to conveyance. ***There is no right to cancel in resale transactions.***

Answer 53

Under the usual cooperative ownership, title to land and building is held by a corporation (or partnership or land trust) and the building management sets a price for stock shares for each unit in the building. Each tenant of a unit in the building purchases stock in the corporation when the tenant pays the agreed-on price for use of a specific apartment. The purchaser then becomes a shareholder of the corporation and, by virtue of that stock ownership, receives a ***proprietary lease*** to the unit for the life of the corporation; there is no deed because there is no ownership of the individual unit. The cooperative building's real estate taxes are assessed against the corporation as owner. Generally, the mortgage is signed by the corporation, creating one lien on the entire parcel of real estate. Taxes, mortgage interest, and principal, plus operating and maintenance expenses, are shared by the tenants/shareholders in the form of monthly assessments. While the cooperative tenants/owners do not actually own an interest in real estate (they own stock, which is personal property), for all practical purposes, they control the property through their stock ownership and their voice in the management of the corporation. The bylaws of the corporation generally provide that each prospective purchaser of an apartment lease must be approved by an administrative board. This hybrid form of ownership has not enjoyed much popularity in North Carolina to date.

Answer 54

They share party walls Sometimes called row houses Each town house unit is individually owned All unit owners have membership in the homeowner association that owns the common areas. The homeowners association will pay real property taxes on the common areas, while each individual unit owner will pay the real property taxes on the unit the individual owns. Town house ownership is similar to condominium ownership with one fundamental difference: the owner of each town house unit also owns the land on which that unit is built.

Answer 55

North Carolina Planned Community Act

Answer 56

any right to occupy a unit of real property during five or more separated time periods (usually consisting of one or two weeks) over a period of at least five years

Answer 57

The North Carolina Time Share Act (G.S. 93A, Article 4) was passed to regulate the development and sale of time-shares. Despite the name given to a development project, if the format meets the definition in the Act, it will be classified as a time-share and subject to its requirements.

Answer 58

all time-share projects must be registered with the state; all developers selling or offering to sell time shares must renew their registrations on or before June 30 of each year. Developers must give prospective purchasers public offering statements prior to contract; and purchasers have a five-day cancellation or rescission period during which they can cancel the purchase without penalty. Any payments received by a time-share developer or broker must be deposited in a trust or escrow account in an insured bank or savings and loan in North Carolina and remain in such account for 10 days or upon cancellation by the purchaser, whichever occurs first. Time-share salespeople must be active real estate brokers operating under a *project broker* Time-share salespeople must be active real estate brokers operating under a project broker, who are subject to disciplinary action by the North Carolina Real Estate Commission. P.S.- There is no separate license for individuals selling time-shares. Individuals who sell time-shares must be properly licensed North Carolina brokers. The Commission can also fine unlicensed time-share developers $500 for each violation of the Act or revoke the project's registration certificate.

Answer 59

Personal property

Answer 60

fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries.

Answer 61

created by a property owner's will

Answer 62

where real estate is the only asset A land trust usually has a definite term (e.g., 20 years), which can be extended.

Answer 63

(similar to a mutual fund, REITS are companies which own real estate.)

Answer 64

Personal property

Answer 65

the beneficiary reaches a certain age, at the death of the beneficiary or the trustor, or when other conditions are met.

Answer 66

The IRS treats a cooperative the same as houses or condominiums for tax purposes. Also The lender may accept stock as collateral for financing, which expands the pool of potential owners.

Answer 67

D Both I and II The North Carolina Time Share Act (G.S. 93A, Article 4) was passed to regulate the development and sale of time-shares. Under the act, all time-share projects must be registered with the state and all developers selling or offering to sell time-shares must renew their registrations on or before June 30 of each year.

Answer 68

register of deeds

Answer 69

To be entitled to a mechanic's lien, the person who did the work must have had a contract (express or implied) with the owner or the owner's authorized representative. A person claiming a mechanic's lien must file the lien claim within 120 days after last furnishing the labor or materials; the lien takes effect from the date that person first furnished the labor or materials. The action to enforce a properly filed mechanic's lien must be brought within 180 days after a worker last furnished labor or materials. A property owner who applies for a building permit for improvements totaling more than $30,000 must designate an approved *lien agent* for the project. ***This includes all private residential and commercial construction projects except improvement to owner-occupied single-family detached property (even if the project cost exceeds $30,000)*** Any mechanic lien filed receives special priority, in order to protect the contractors. Any potential lien claimant must serve notice to the lien agent within 15 days of beginning work on the project or lose the lien priority afforded mechanics' liens. Projects costing under $30,000 are exempt from requirement for a lien agent designation.

Answer 70

commercial transaction; fully performed but before closing; 90 days; 18 months

Answer 71

judgment; money judgment

Answer 72

Both unpaid state inheritance taxes and unpaid state income taxes give rise to general, involuntary liens against all property owned by the individual taxpayer. In North Carolina, both types of liens last for 10 years.

Answer 73

An IRS tax lien results from a person's failure to pay any portion of federal IRS taxes, such as income and withholding taxes. A federal tax lien is a general, involuntary lien on all real and personal property held by the delinquent taxpayer. Its priority is based on the date of filing or recording; it does not supersede previously recorded liens.

Answer 74

Although the fee simple estate held by a typical real estate owner can be reduced in value by the lien rights of others, the owner is still free to convey title to a willing purchaser. The purchaser will, however, buy the property subject to any liens because liens run with the land; that is, they will bind successive owners if steps are not taken to clear the liens. Remember, liens attach to the property, not to the property owner. Therefore, although a purchaser who buys real estate under a delinquent lien is not responsible for payment of the debt secured by the lien, the purchaser does face a possible loss of the property if the creditors take court action to enforce the payment of their liens.

Answer 75

superior liens

Answer 76

pure race system One exception to this rule is the mechanic's lien: the priority of a mechanic's lien dates back to the date the labor began or materials were first provided rather than to the date the lien was filed. Remember, real property tax and special assessments can move in front of or take priority over any of these recorded liens. Real property taxes are always the most superior lien.

Answer 77

subordination

Answer 78

A judgment or another decree affecting real estate is rendered at the conclusion of a lawsuit. Generally, there is a considerable time lag between the filing of a lawsuit and the rendering of a judgment. When any suit is filed that affects title to a specific parcel of real estate (such as a foreclosure suit), the person bringing the lawsuit may file a lis pendens (Latin for "litigation pending"). When a lis pendens is filed, anyone acquiring an interest in the property takes that interest subject to any judgment or decree the court may issue. Lis pendens is not a lien but rather a notice that there is an action or lawsuit pending that may adversely affect the title. The lis pendens acts more like an encumbrance against the title. EXAMPLE If a lender is filing a foreclosure suit against a property owner, it will file a lis pendens against the property. If the property owner should sell the property during the course of the legal action, the new purchaser would take title subject to the outcome of the foreclosure action.

Answer 79

Another encumbrance against real property is a recorded writ of attachment for a debt other than a mortgage. A creditor can request the court to issue a writ of attachment against the debtor's unsecured property. By ordering a lien on the debtor's assets until the law suit is decided and a judgment is rendered, the unsecured real estate remains available to satisfy the judgment. Once a judgment is recorded, a writ of execution will be issued directing the county sheriff to sell the property to satisfy the judgment.

Answer 80

A personal interest in or right to use the land of another is an easement in gross. An easement in gross benefits a person or an entity, not a parcel of property, so there is no dominant tenement or estate. Examples of commercial easements in gross are the easement rights a railroad has in its right-of-way, billboards easements, or utilities easements.

Answer 81

The first method of creating an easement is by **express grant**. This occurs when the servient owner gives an easement either by spoken or written words to the dominant owner. Typically this easement is created by a written agreement between the parties that establishes the easement right. The creation of an easement always involves two separate parties, one of whom is the owner of the land (servient owner) over which the easement runs. The second method of creating an easement is by **implication**. An easement that is not created by express statements between the parties; but as a result of surrounding circumstances that dictate that an easement must have been intended by the parties. These are sometimes referred to as **implied easements**. An easement by necessity (see later discussion) is an example of an easement by implication. The third method of creating an easement is by **operation of law**. The phrase "by operation of law" is a legal term that indicates that a right or liability has been created for a party, irrespective of the intent of that party, because it is dictated by existing legal principles. An easement by prescription (see later discussion) is an example of an easement created by operation of law.

Answer 82

nonpossessory; possessory

Answer 83

An easement by necessity, or easement by implication of law, arises because all owners must have rights of ingress to and egress from their land—they cannot be landlocked. If a grantor has conveyed property that is completely surrounded by the grantor's property (thus landlocking the grantee), an easement by necessity will be created.

Answer 84

When a claimant has made use of another's land for a certain period of time, as defined by state law, an easement by prescription is acquired. This prescriptive period is 20 years in North Carolina. The claimant's use must have been continuous, exclusive, and without the owner's approval. Additionally, the use must have been visible, open, and notorious, so that the owner could have readily learned of it. A property owner can prevent an easement by prescription from being created by giving permission to the user.

Answer 85

An easement may be terminated when the purpose for which the easement was created no longer exists; if the easement holder becomes the owner of the land where the easement is located (e.g., land owner B buys lot A—a situation called a merger); by release of the right of easement to the owner of the servient tenement; by abandonment of the easement (the intention of the parties is the determining factor); by non-use of a prescriptive easement.

Answer 86

A license is a personal, nontransferable privilege to enter the land of another for a specific purpose, such as a license for a friend to hunt on a farmer's land during the winter. A license differs from an easement in that it can be terminated or revoked. Generally, if the right to use another's property is given orally or informally, it is considered to be a license rather than an easement. Because a license is not considered to be an interest in the land itself, it is not considered an encumbrance. A license automatically ends with the death of either party or with the sale of the land.

Answer 87

All real property in North Carolina is subject to taxation. Although counties and municipalities determine real estate property tax rates within their jurisdictions, the Machinery Act regulates standards for real property taxation, standards for property tax assessment, standards for property tax appraisal, and requirements for tax-exempt status. Property generally considered tax-exempt or eligible for special tax treatment includes that owned by nonprofit religious, educational, and charitable organizations; property owned by the elderly and handicapped; agricultural, horticultural, and forest lands; and some properties with energy-efficient heating and cooling systems.

Answer 88

assessment

Answer 89

local board of appeal; board of review

Answer 90

is the way a taxing body authorizes the expenditure of funds and provides for the sources of the funding. Appropriation generally involves the adoption of an ordinance or the passage of a law that states the specific terms of the proposed taxation. The amount to be raised from the general real estate property tax is then imposed on property owners through a tax levy

Answer 91

is the formal action taken to impose the tax, usually by a vote of the taxing district's governing body.

Answer 92

The property tax rate for each taxing body is computed separately. To arrive at a property tax rate, the total monies needed for the coming fiscal year are divided by the total assessments of all the real estate located within the taxing body's jurisdiction.

Answer 93

¹⁄₁₀₀₀ of a dollar

Answer 94

applying the property tax rate to the assessed valuation of the property

Answer 95

octennial reappraisal

Answer 96

horizontal adjustments

Answer 97

dividing the total amount of revenue needed by the total assessed value of all the property in the county or city.

Answer 98

September 1st

Answer 99

mass appraisal

Answer 100

10 days; 20 days

Answer 101

C Property taxes attach to the property on January 1, are due and payable September 1, and can be paid without penalty until January 5 of the year following assessment.

Answer 102

describe the land but not the improvements that are appurtenant and automatically run with the land.

Answer 103

commonly known as and the street address

Answer 104

The street address standing alone

Answer 105

(1) metes and bounds, (2) the rectangular (government) survey, and (3) reference to recorded plat (lot and block)

Answer 106

point of beginning (POB); calls; call; call

Answer 107

township lines; township tiers

Answer 108

6 miles; 36

Answer 109

16; 16; school section

Answer 110

physical survey; mortgage location survey; identification survey

Answer 111

topographic survey; topo survey

Answer 112

B) Contract to convey real property interest

Answer 113

D) all of these. Township squares are subdivided into sections and subsections called halves and quarters, which can be further divided. Each township contains 36 sections. Each section is one square mile or 640 acres, with 43,560 square feet in each acre.

Answer 114

C) government survey system The rectangular survey system, sometimes called the government (rectangular or geodetic) survey system, was established by Congress in 1785 to standardize the description of land acquired by the newly formed federal government. This form of land description is not used in North Carolina or the other original British colonies.

Answer 115

C Explanation 160 acres – 20 = 140 acres to buy × $300 = $42,000

Answer 116

C) a recorded deed. In North Carolina, the method is by reference to a publicly recorded document, usually an earlier deed to the identical property. This deed typically contains a legal description of the property that is to be conveyed

Answer 117

The deed must be in writing. The grantor must have the legal capacity to execute a deed. Grantee named with reasonable certainty must be identified. There must be adequate words of conveyance. There must be an accurate legal description of the property conveyed. The deed must be signed by the grantors. The deed must be delivered to and voluntarily accepted by the grantee.

Answer 118

Deeds do not have to be witnessed. Deeds do not have to be dated; although, for practical matters, it may be wise to do so. Deeds do not have to include a statement as to the exact amount of consideration (the amount of money that was paid for the property). Deeds do not have to be acknowledged (i.e., notarized). Deeds do not have to be recorded to be valid, but under the Connor Act, the grantees must record the valid deed to protect their interest as to third parties under the law. Effective in 1999, deeds do not have to be sealed in North Carolina to be valid. Standard deed forms may continue to have the word seal after the signature; however, it is no longer required to create a valid deed. Signing under seal does have certain legal advantages such as extending the statute of limitations protecting the parties' rights from three years to 10 years.

Answer 119

Note that acknowledgment (or notarization) is necessary before a deed can be recorded, and recording a deed is necessary to protect the grantee's interests in the property.

Answer 120

Covenant of seisin and the right to convey: The grantor warrants that he or she is the legal owner of the property and has the right to convey title to it. Delivery of seisin is the actual transfer of title. Covenant against encumbrances: The grantor warrants that the property is free from any liens or encumbrances except those of record. Encumbrances would generally include such items as mortgages, mechanics' liens, real estate tax liens, protective covenants, and easements. Covenant of quiet enjoyment: The grantor guarantees that the grantee's title will be good against third parties who might bring court actions to establish superior title to the property. If the grantee's title is found to be inferior, the grantor is liable for damages. Covenant of further assurance: The grantor promises to obtain and deliver any instrument needed to make the title good. For example, if an error in the deed is found, the grantor agrees to resign a new deed to correct the mistake. Covenant of warranty forever: The grantor guarantees that if at any time in the future the title fails, he or she will compensate the grantee for the loss sustained. However, it is in the best interest of the grantee to obtain title insurance because at the time of a later claim, the grantor may be dead or financially insolvent.

Answer 121

A conveyance that carries only two covenants is called a special warranty deed (also known as a limited warranty deed). The grantor warrants that he or she received title to the land and that the property was not encumbered during the time he or she held title except as noted in the deed. Special warranty deeds generally contain the words remise, release, alienate, and convey in the granting clause. Any additional warranties to be included must be specifically stated in the deed.

Answer 122

A bargain and sale deed contains no express warranties against encumbrances. However, it does imply that the grantor holds title and possession of the property. The granting clause usually states a person's name or name of an entity and the words grants and releases or grants, bargains, and sells. Because the warranty is not specifically stated, the grantee has little legal recourse if title defects appear later. In some areas, this deed is used in foreclosures and tax sales. The buyer should purchase, or the seller provide, title insurance for protection.

Answer 123

A quitclaim deed (non-warranty deed) provides the grantee with the least protection of any deed. It carries no covenant or warranties and conveys only such interest, if any, that the grantor may have when the deed is delivered. By a quitclaim deed, the grantor only remises, releases, and quitclaims an interest in the property to the grantee. The deed might convey an easement; it might re-convey equitable title back to a seller; it might convey nothing at all.

Answer 124

A correction deed is used when there has been an error in a previous deed. For example, if the description of the property in the original deed was incorrect, a correction deed will be used to make the correction. Errors in names or dates would also be corrected by this deed.

Answer 125

When a grantor conveys property as a gift (that is, no consideration or only token consideration has been accepted for the property), a deed of gift is used. A deed of gift must be recorded within two years or it becomes void. Because no consideration is exchanged, there is no need to pay excise tax.

Answer 126

A deed of release is used to release a parcel of property from a mortgage or deed of trust lien when the real estate loan has been paid in full.

Answer 127

A deed of conveyance executed by a trustee is a trustee's deed and is used when a trustee named in a will, trust agreement, or trust deed conveys the real estate to anyone other than the trustor. The trustee's deed sets forth the fact that the trustee executes the instrument in accordance with the powers and authority granted to him or her by the trust instrument. A trustee's deed is generally used to transfer title after a foreclosure auction.

Answer 128

Some ownership rights can be severed from the land and transferred by deed, such as the harvesting of timber or minerals located on the property.

Answer 129

One characteristic of these special-purpose deeds is that the full consideration is usually stated in the deed. This is done because the deed is executed pursuant to a court order; because the court has authorized the sale of the property for a given amount of consideration, this amount should be exactly stated in the document.

Answer 130

Open (well known to others) Continuous (uninterrupted for the required period) Exclusive (not shared with another) Adverse to the true owner's possession (the adverse possessor must intend to claim that the land occupied is his or her own) Notorious/hostile (without the permission of the owner)

Answer 131

adverse possession

Answer 132

This statute allows for the equal division of property among eligible heirs, or, in the event of no heirs, having the property escheat to the North Carolina State Educational Assistance Authority. This statute does not override an active survivorship clause in a deed.

Answer 133

is the legal presumption that information may be obtained by an individual through due diligence. Properly recording documents in the public record serves as constructive notice to the world of an individual's rights or interest, as does the physical possession of a property. Because the information or evidence is readily available to the world, a prospective purchaser or lender is responsible for discovering the interest.

Answer 134

means not only that the information is available but also that someone has been given the information and actually knows it. An individual who has searched the public records and inspected the property has actual notice, also known as direct knowledge. If it can be proved that an individual has had actual notice of information, that person cannot use a lack of constructive notice (such as an unrecorded deed) to justify a claim.

Answer 135

provide that any written document that affects any estate, right, title of interest in land must be recorded in the municipality where the land is located. With recordation, anyone interested in the title to a parcel of property will know where to look to discover any interest of other parties.

Answer 136

marketable title

Answer 137

(1) be free from any significant liens and encumbrances; (2) disclose no serious defects; (3) be free of doubtful questions of law or fact to prove its validity; (4) protect a purchaser from the hazard of litigation or any threat to quiet enjoyment of the property; and (5) convince a reasonably well-informed and prudent person, acting on business principles and willful knowledge of the facts and their legal significance, that the property could in turn be sold or mortgaged at a fair market value.

Answer 138

that if a chain of title can be traced back for 30 years and no other claim has been recorded during that time, the title becomes a marketable title. Any conflicting claims predating the 30-year chain of title may be extinguished. The practical effect of this act is to eliminate obsolete defects in the chain of title.

Answer 139

owner's title; lender's title

Answer 140

payoff of the mortgage loan

Answer 141

American Land Title Association (ALTA)

Answer 142

Standard Coverage Defects found in public records Forged documents Incompetent grantors Incorrect marital statements Improperly delivered deeds Extended Coverage Standard coverage plus defects discoverable through: property inspection, including unrecorded rights of persons in possession; examination of survey, and unrecorded liens not known by policyholder. Not Covered by Either Defects and liens listed in policy Defects known to buyer Changes in land use brought about by zoning ordinances Defects that would have been shown by an accurate survey, if a survey was not done

Answer 143

After closing, the attorney issues a final opinion on title, which includes recording information for the deed and deed of trust and so forth. The final opinion on title goes to the title insurance company, which issues the title insurance policy based on this information. Under the title insurance policy, the title insurance company promises to defend the title as insured, as well as to pay any claims against the property if the title proves to be defective. This coverage begins after closing and issuance of the policy and covers only title defects undiscovered before closing or not exempted in the title commitment. The opinion issued by the attorney is just that: an opinion based on the search of public records. It is not a guarantee of good title.

Answer 144

False Title insurance is paid for once at closing for the life of the policy.

Answer 145

deed transfer taxes

Answer 146

C) The grantor ensures that the title will be good against the title claims of third parties. With the covenant of quiet enjoyment, the grantor guarantees that the grantee's title will be good against third parties who might bring court actions to establish superior title to the property. If the grantee's title is found to be inferior, the grantor is liable for damages.

Answer 147

B) Easements When a title examination is conducted, the title examiner lists each instrument in chronological order, along with information relative to taxes, judgments, special assessments, surveys, easements, and the like.

Answer 148

D) a title insurance policy.

Answer 149

A) a title insurance policy.

Answer 150

B) A title insurance policy While deeds offer no guarantee of marketable title, a title insurance policy is a contract in which a title insurance company warrants to make good any loss incurred by a buyer that arises from defects in title to real estate, or any encumbrances or liens. Title insurance protects the policyholder against a loss from some event that has already happened.

Answer 151

police power

Answer 152

planning, zoning, subdivision regulations, building codes, and environmental protection legislation.

Answer 153

extra-territorial jurisdictions (ETJs)

Answer 154

An overlay district is a type of zoning that is superimposed over another type of zoning. The overlay zone can modify the use of the original zone. A common example is when an area that is zoned single-family residential is also designated as a flood zone. This means that additional restrictions and regulations are imposed on developments and improvements in that area. Two other examples of overlay districts are historic preservation and aesthetic zoning.

Answer 155

When a particular property or group of properties is rezoned to permit a use different from the neighboring properties' use, it is referred to as spot zoning

Answer 156

all divisions of a tract or parcel of land into two or more lots, building sites, or other divisions for the purpose of sale or building development (whether immediate or future) and includes all division of land involving the dedication of a new street or a change in existing streets.

Answer 157

(1) a division of land if each parcel has more than 10 acres with no street right-of-way dedication and (2) a division of land no larger than two acres into no more than three lots with no street right-of-way dedication involved, when the parcel is owned by a single entity.

Answer 158

the final plat has been recorded

Answer 159

(1) the initial planning stage, (2) the final planning stage, and (3) the disposition, or start-up. During the initial planning stage, the subdivider seeks out raw land in a suitable area. Once the land is located, the property is analyzed for its highest and best use, and preliminary subdivision plans are drawn up accordingly. Close contact is initiated between the subdivider and local planning and zoning officials. If the project requires zoning variances, negotiations for these begin. The subdivider also locates financial backers and initiates marketing strategies. The final planning stage is basically a follow-up of the initial stage. Final plans are prepared, approval is sought from local officials, permanent financing is obtained, the land is purchased, final budgets are prepared, and marketing programs are designed. The disposition, or start-up, carries the subdividing process to a conclusion. Subdivision plans are recorded with local officials, and streets, sewers, and utilities are installed. Buildings, open parks, and recreational areas are constructed and landscaped if they are part of the subdivision plan. Marketing programs are then initiated, and title to the individual parcels of subdivided land is transferred as the lots are sold.

Answer 160

(1) Incorporates as an attachment a copy of the preliminary plat referenced in the contract and obligates the owner to deliver to the buyer a copy of the recorded plat prior to closing and conveyance. (2) Plainly and conspicuously notifies the prospective buyer or lessee that a final subdivision plat has not been approved or recorded at the time of the contract, that no governmental body will incur any lessee with respect to the approval of the final subdivision plat, that changes between the preliminary and final plats are possible, and that the contract or lease may be terminated without breach by the buyer or lessee if the final recorded plat differs in any material respect from the preliminary plat. (3) Provides that if the approved and recorded final plat **does not differ** in any material respect from the plat referred to in the contract, the buyer or lessee may not be required by the seller or lessor to close any earlier than ***5 days after the delivery of a copy of the final recorded plat*** (4) Provides that if the approved and recorded final plat **differs** in any material respect from the preliminary plat referred to in the contract, the buyer or lessee may not be required by the seller or lessor to close any earlier than **15 days after the delivery of the final recorded plat, during which 15-day period the buyer or lessee may terminate the contract without breach or any further obligation and may receive a refund of all earnest money or prepaid purchase price**

Answer 161

Approval must be granted by the proper county agency (usually a planning board) before recordation can take place. North Carolina now allows the acceptance of monies and contracts on subdivision parcels once the preliminary plat has been approved. However, if there are any material changes from the preliminary to the final plat map, a buyer is allowed to cancel any existing contract and receive a refund of all monies. A broker who closes a sale on a lot before final approval of the subdivision is granted and recorded may be subject to a civil lawsuit or may be criminally prosecuted as well as face disciplinary action by the North Carolina Real Estate Commission.

Answer 162

These restrictions can be included in the subdivision plat or they may be set forth in a separate recorded instrument, commonly referred to as a declaration of restrictions.

Answer 163

The law requires those engaged in the interstate sale or leasing of subdivision lots (including condominiums, cooperative units, and campsites) to file a statement of record and register the details of the land with HUD The Act does not apply to the sale of lots in a subdivisions... - Containing fewer than 25 - Those in which each lot is 20 acres or more - Lots offered for sale solely to developers - Lots on which buildings exist or where a seller is obligated to construct a building within two years. Interstate sales or leasing activities include out-of-state mailers, newspaper ads, television advertising directed to out-of-state buyers, and out-of-state telephone solicitation. Prior to signing a purchase agreement or lease, the developer must furnish prospective buyers or lessees with a property report containing all essential information about the property, such as - distance over paved roads to nearby communities, - number of homes currently occupied, - soil conditions affecting foundations and septic systems, - type of title a buyer receives, - existence of liens. Failure to provide the property report prior to contract formation may give the consumer grounds to void the contract. If the seller misrepresents the property in any sales promotion, anyone induced to purchase a lot by the promotion can sue the seller for civil damages. Failure to comply with the law also may subject a seller to criminal penalties of fines and imprisonment.

Answer 164

material fact

Answer 165

county health departments

Answer 166

North Carolina Department of Environmental Quality

Answer 167

To request testing, a person files an application with the county health department explaining the proposed use of the property. A registered sanitarian from the health department will inspect the lot/tract, gather soil samples from different places on the parcel, and rate the various samples as either suitable, provisionally suitable, or unsuitable for an underground septic system. If the sanitarian finds that there is sufficient suitable or provisionally suitable soil for an onsite system, and enough land for a repair area, then an improvements permit will be issued. Once issued, the permit is valid for a specified period of time, even if the standards later change, so long as the property features or its proposed uses have not changed. The period of time the permit is valid varies from county to county. The septic permit will set a capacity limit for the system, typically specifying the number of bedrooms for a residence (with presumed occupancy of two persons per bedroom), or the maximum number of rooms, or some other measure for a nonresidential structure. The permit may prohibit the use of an automatic dishwasher, garbage disposal, or other use that might overload the system. The permit also may include a map depicting the best location for the system and repair area.

Answer 168

where wastewater is discharged directly into the yard or into a nearby creek or stream, rather than into any approved treatment system. Straight-piping is illegal because state law requires that any person owning or controlling a residence, place of business or place of public assembly must discharge all wastewater directly to an approved wastewater system for that specific use. Wastewater includes grey water (i.e., water used for dishes, laundry and bathing) and black water which is sewage.

Answer 169

has designated many areas bordering on rivers and streams as flood hazard areas, which are subject to federal regulations concerning improvements and construction in those areas. FEMA produces maps that designate these flood hazard areas, and flood insurance is required under the National Flood Insurance Program (NFIP) if a federally related mortgage loan is to be used for properties within those areas.

Answer 170

eminent domain

Answer 171

The federal government has recently mandated that new commercial buildings and older public buildings that undergo remodeling must meet the standards of the Americans with Disabilities Act (ADA). The purpose of this legislation is to facilitate accessibility and mobility by ramp construction, safety rails, wider doors, and other accommodations. ADA does not apply to residential housing.

Answer 172

The term restrictive covenant is being replaced by the term protective covenant. Both have essentially the same meaning, which is defined by the North Carolina Real Estate Commission as follows: "Protective covenants are enforceable conditions that restrict the manner in which an owner may use his/her property" (1997-1998 Update Course). The term protective covenant is a more modern term and better implies the intended use, which is to protect owners from uses that may have an adverse effect on value or enjoyment.

Answer 173

B) red flag situations.

Answer 174

C) Residential Property and Owners’ Association Disclosure Statement

Answer 175

A) historic preservation zone

Answer 176

A) court injunction.

Answer 177

B) may be found by the courts to be a taking without the payment of just compensation to the property owner.

Answer 178

B) Declaration of restrictive covenants

Answer 179

D) acceptable land uses. Explanation Building codes determine types of plumbing and electrical materials allowed. The height and structure requirements and methods of construction to be used are also determined by building codes. Zoning codes determine acceptable land uses.

Answer 180

A) To provide evidence of compliance with municipal regulations

Answer 181

D) subject to criminal penalties of fines and imprisonment.

Answer 182

the fiduciary relationship between the principal/client and the agent.

Answer 183

the individual who is authorized and consents to represent the interests of another person. In the real estate industry, principals are hiring an entire company and all the company's affiliated brokers to represent them. Even though the firm is the agent, the broker-in-charge would be personally accountable for agency law compliance.

Answer 184

the fiduciary relationship between the subagent and the principal.

Answer 185

one who is employed by a person already acting as an agent (such as a provisional broker licensed under a broker-in-charge who is employed under the terms of a listing agreement). Simply stated, a subagent is an agent of an agent.

Answer 186

the real estate licensee who assists buyers and sellers in reaching an agreement in a real estate transaction without representing interests of either party. The licensee treats both parties equally as customers. This nonagency relationship is not allowed in North Carolina.

Answer 187

called subagents of the principal.

Answer 188

Obedience Loyalty Disclosure Confidentiality Accounting Reasonable care and diligence

Answer 189

Honesty Fairness Disclosure of material facts

Answer 190

EIFS or synthetic stucco

Answer 191

polybutylene

Answer 192

those properties branded by society as undesirable because of events that occurred there. Some properties are typically marked by a criminal event: a homicide, suicide, or other violence; illegal drug or gang-related activity; or other events that render the property socially unmarketable in the community's view. Another psychologically impacted property would be a purported haunted house, which is not a material fact. The one exception to this rule is if the death or illness is AIDS-related. Because persons with AIDS (or HIV infection) are considered legally handicapped under fair housing laws, an agent cannot disclose this condition, even if asked. Instead, the agent should tell the person who asked the question that the agent is prohibited by law from answering the question.

Answer 193

Disciplinary action by NCREC—any violation of a duty owed to the principal or third parties is grounds for disciplinary action by NCREC. If the Commission finds that the agent did in fact violate the license law, that agent's license may be revoked or suspended. A civil action in court brought by the injured party—if the breach of duty harms either the principal or a third party, the agent may be sued and found liable for the damages caused by the breach. Note that if the agent's improper behavior is deemed to be within the scope of the agent's duties, the agent's principal also may be held liable for the damages caused by the agent. The principal can in turn sue the agent for reimbursement for those damages. Criminal prosecution brought by the district attorney—a violation of a provision of the real estate license law is also a misdemeanor (see G.S. 93A-8). If the agent's breach of duty also is a criminal act, such as fraud or embezzlement, the district attorney may bring a criminal action against the agent.

Answer 194

To act in good faith (to cooperate with the agent and refrain from hindering the agent's efforts)—for example, if the seller-client refuses to let the agent show the property, this is a breach of good faith. To pay the agent the agreed-on compensation when the agent finds a ready, willing, and able buyer—once the agent brings the seller a buyer who is ready, willing, and able to purchase the property on the seller's terms, the agent has earned a commission, whether or not the seller decides to sell the home. Similarly, the principal/client is a buyer, the buyer is obligated to make sure that his or her agent is compensated for the agent's efforts to find the appropriate property.

Answer 195

Property owners had no affirmative duty to reveal defects about the property. This is still true in North Carolina. Sellers are always liable for fraudulent misrepresentations.

Answer 196

also applies to real estate agents (and some property owners) including poasting on the internet and social media. Agents who engage in the prohibited acts described previously may find themselves liable for treble (triple) damages and attorneys' fees under certain circumstances.

Answer 197

The principal who violates the principal's duties either to the agent or to a third party is liable for the damage caused. The principal may be subject to both a civil lawsuit and criminal prosecution (if so warranted). The principal also may be held liable and accountable for the agent's misconduct, referred to as a tort, which is a wrongful act by an agent while representing the principal and acting within the scope of the employment agreement that created the agency.

Answer 198

A universal agent is a person who is empowered to do anything the principal could do personally. There are virtually no limits to the universal agent's authority to act on behalf of the principal. An unlimited power of attorney would be an example of universal agency. This type of agency is seldom practiced by a real estate broker in a typical real estate transaction. AKA Attorney in fact or power of attorney

Answer 199

A general agent may represent the principal in a broad range of matters related to a particular business or activity. The general agent may, for example, bind the principal to any contracts within the scope of the agent's authority. A real estate broker typically does not have this scope of authority as an agent for a consumer in a real estate sales transaction. Brokers usually serve as general agents of their real estate brokerage firms. A more typical example of a general agent would be a property manager hired as a general agent for the landlord in the management of certain properties.

Answer 200

A special agent is authorized to represent the principal in only one specific act or business transaction, and under limited, detailed instructions with no power to bind the principal. A real estate broker is usually a special agent. If hired by a seller, the broker's duty is limited to finding a "ready, willing, and able buyer" for the property. A special agent for a buyer has the limited responsibility of finding a property that fits the buyer's criteria. As a special agent, the broker cannot bind the principal to any contract. It is important to remember that a special agency relationship provides only limited authority.

Answer 201

True Special agents have only limited authority on behalf of their principals, so they cannot bind their clients to any contracts.

Answer 202

implied authority

Answer 203

although legal in other states, implied agency agreements are illegal under North Carolina real estate license law, which requires all agency agreements be in writing.

Answer 204

ratification (apparent authority); (ratifies)

Answer 205

gratuitous

Answer 206

If there is a breach by one of the parties, such as abandonment by the agent or revocation by the principal (The breaching party might be liable for damages.)

Answer 207

Agency can be terminated by operation of law, as in a bankruptcy of the principal (because title to the property would be transferred to a court-appointed receiver)

Answer 208

Agency can be terminated by destruction or condemnation of the property – if a seller signs an exclusive right to sell listing agreement with a firm to list a one-acre lot that includes a 3,000 square foot house and the house burns to the ground, the listing agreement would terminate.

Answer 209

Agency can be terminated by death or incapacity of either party (Notice of death is not necessary. Note that if a property is listed with a brokerage firm, the firm must dissolve to "die." If the individual listing agent dies, the listing would not be terminated because the listing belongs to the brokerage firm rather than to the deceased listing agent.)

Answer 210

Express promise or implied obligation – for example, if an agent is still holding a client's money after the termination of the agency relationship the agent still owes the client the duty to safeguard and account for the money. Pending transaction at termination date of agency agreement – for example, in a sales transaction when a buyer agency contract expires after the buyer has entered into a contract, but before the transaction has closed, the broker will continue to owe agency duties to the buyer. Self-dealing – the broker seeks to deal on their behalf after the listing has expired. The courts have held that real estate brokers have a continuing duty of loyalty and good faith to the former principal to the extent that the brokers may not use their former position of confidence to profit or gain an unfair advantage over former clients. For example, a broker lists a property for sale at $300,000 and does not sell during the listing period. The broker finds a buyer willing to pay the full price the day the agency agreement is set to expire. After the listing expires, the broker offers to purchase the property from the seller for $250,000 and then turns around and sells to the buyer for $300,000. Duty of confidentiality may be expected to continue as long as the agent has no duty to disclose to a new client.

Answer 211

Seller is the client; buyer is the customer

Answer 212

Buyer is the client; seller is the customer

Answer 213

Either the buyer or the seller is the client, but not both in the same transaction

Answer 214

Both the buyer and the seller are the clients in the same transaction

Answer 215

Neither the buyer nor the seller are clients; both are customers; not permitted in North Carolina

Answer 216

The buyer's agent may receive a flat fee or a share of the listing commission or both, depending on the terms of the agency agreement.

Answer 217

is a legal concept that might allow a consumer to successfully sue the seller and/or the listing firm for illegal or inept actions performed by the subagent firm and/or its brokers

Answer 218

It is also important to note that when a real estate broker/firm becomes an agent under an agency agreement with a principal, all individual real estate brokers affiliated with the broker/firm automatically become subagents of the principal, unless there is a specific agreement to the contrary.

Answer 219

The terms subagent and subagency usually refer to a firm's brokers, but they may refer to co-brokerage firms and their brokers.

Answer 220

As discussed earlier, when a co-brokerage firm acts as a subagent of the seller, buyers are not represented by any of the licensees involved in the sale.

Answer 221

co-brokered

Answer 222

in-house sale

Answer 223

equally loyal

Answer 224

undisclosed dual agency violates license laws [see G.S. 93A-6(a)(4)] and the law of agency. It can result in rescission of the sales contract, forfeiture of the commission, or the filing of a suit for damages.

Answer 225

1) one individual broker represents both the buyer and the seller in the same transaction; 2) two brokers working for Roomy Manor at the same office location, but one broker works with the seller and one broker works with the buyer and 3) two brokers working for Roomy Manor, but one works at the Markdale branch location and works with the seller, and the other works at the Sunnydate branch location and works with the buyer. All three situations are examples of dual agency

Answer 226

The written authority for dual agency must be obtained upon the formation of the relationship, except when an agent is working with a buyer or tenant under an oral agency agreement pursuant to A.0104(a), in which event the express oral authority for dual agency must be reduced to writing not later than the time that one of the parties represented by the agent makes an offer to purchase, sell, rent, lease, or exchange real estate to another party.

Answer 227

Willingness to accept any terms of sale other than those offered Motivation for participating in the transaction (unless required by statute) Any confidential information unless disclosure is mandated by statute

Answer 228

A broker designated to represent a buyer or seller in accordance with Paragraph (j) of this Rule shall disclose the identity of all of the brokers so designated to both the buyer and the seller. The disclosure shall take place no later than the presentation of the first offer to purchase or sell.

Answer 229

the firm continues to act as a dual agent; the individually designated brokers do not.

Answer 230

at the earliest opportunity

Answer 231

Situation #1: The seller agreement does not authorize dual agency in the listing agreement. Consumer contacts listing company to see the property. The broker reviews the disclosure form and offers to show the property as a seller agent, cautioning the buyer that nothing the buyer reveals is confidential and the buyer should act as if he or she is talking directly to the owner/seller. If the buyer agrees, the broker provides written notice of seller agency and shows the property. Answer: Dual agency has not been attempted in this situation. The company already has one principal (the seller) who has not authorized its agent to function as a dual agent. The listing broker offers to work with the buyer as a seller agent, its only permitted avenue at present, and the buyer, having received the agency disclosure form and having been cautioned as to the lack of confidentiality by the listing agent, consents to the listing agent acting solely as a seller agent. Listing/leasing agents may always work with prospective buyers/tenants as owner agents only, so long as the broker's agency status is disclosed and the buyer/tenant knowingly consents and does not insist on independent representation (i.e., a buyer or tenant agent). Situation #2: The seller agreement does not authorize dual agency in the listing agreement. A broker in the company is working with a buyer under an oral buyer agency agreement. The buyer now wants to see one or more of the company's listings. Answer: If the oral buyer agency agreement does not already authorize dual agency, the broker first must explain dual agency to the buyer and obtain the buyer's consent. Then, before the broker may show the property, the broker first must contact its other principal, the seller, explain dual agency and obtain the seller's consent at least orally. If the seller refuses to consent, then the property may not be shown to the buyer client. Note: Even though the listing agreement is already in writing and does not authorize dual agency, the seller's oral consent to dual agency as to that buyer is sufficient only because the buyer agency agreement is still oral. If after viewing the property, the buyer wishes to make an offer, the buyer agency agreement first must be reduced to writing and must contain authorization for dual and/or designated agency before any offer is presented. Further, the seller's written consent to dual/designated agency, as least for this buyer, must be obtained before the offer may be presented. This may be done as an amendment to the listing agreement or as an addendum to the listing agreement, but it must be in writing before the offer is presented. Brokers are strongly advised to first obtain all necessary agency authorizations in writing before they prepare an offer. Otherwise, they may waste time preparing an offer they cannot present. Situation #3: The seller agreement authorizes dual and designated agency in the listing agreement. Buyer agency agreement is in writing and does not authorize dual agency. Buyer wants to see the company's listing. Answer: In this situation, because both the listing agreement and the buyer agency agreement are already in writing, oral consent to dual agency will not be sufficient. The buyer client must first authorize the company in writing to act as his/her dual agent, at least for this property, before the buyer may be shown the property. If the written buyer agency agreement had already authorized dual agency, then there would not have been any impediments to either showing the property or preparing and presenting an offer.

Answer 232

if an agent has received confidential information about one party to the transaction, that agent has an obligation to refuse an appointment as the designated dual agent of the other party to the transaction. After a broker has been appointed as a designated agent for one of the firm's clients, the designated agent exclusively represents that principal in the transaction. Therefore, if the agent learns any confidential information about the other principal in the transaction after being designated, the designated agent must disclose that information to the client that they exclusively represent. There cannot be designated dual agency unless dual agency exists first. The firm owes the same fiduciary duties to both parties which has the effect of neutralizing the firm and its agents when acting as dual agents, but designated dual agents owe their fiduciary duties exclusively to the party they are designated to represent, even though the firm has an equal obligation to both parties. Another issue to consider in the handling of dual agency relationships is whether the clients have hired a sole practitioner rather than a real estate firm with associated licensees. A sole practitioner, that is a one-person brokerage operation, can act as a dual agent but cannot act as a designated dual agent. Designated dual agency requires two individual brokers, each solely representing either the buyer or the seller.

Answer 233

"to have and to hold" is a key component of a deed or a lease in real estate transactions. This clause defines the duration and extent of the interest being conveyed or granted by the deed or lease. It typically comes after the granting clause, which specifies the type of estate being conveyed (e.g., fee simple, life estate).

Answer 234

A property manager of residential property usually will represent only the property owner and will not seek to represent the tenant as well, which would cause the agent to become a dual agent. However, commercial tenants may or may not be represented. Whenever an agent seeks to establish an agency relationship with a commercial tenant thereby making the tenant a client, the agreement for brokerage services between the broker and the tenant shall be express and shall be reduced to writing not later than the time any party makes an offer to rent or lease property.

Answer 235

False Exclusive seller agency broker firms were the most common form of brokerage entity. These brokerage firms limited their practice to listings and worked with buyers only to achieve the seller-clients' goals.

Answer 236

review it *The Commission also provides a Q and A brochure about the form on its website*

Answer 237

conversation between a broker and a consumer shifts from facts about the property to possible confidential information about the consumer's needs, wishes, and abilities or when the consumer or broker begins to act as if there is a fiduciary relationship. Confidential information is information that would harm someone's negotiating position, including motiviation, abillity, and price. Let's look at a few examples of first substantial contact. The form is not designed to replace the review and explanation of agency by the broker, but rather to facilitate this explanation. The broker must keep a copy of the signed form on file for three years. (See Rule A.0108.)

Answer 238

Karen was holding an open house at her listing. While at the open house Steven stopped by to view the home. After taking a look around, Steven began to tell Karen that he loved the house and was moving to the area for work. Has first substantial contact occurred? Yes. Steven began to tell her about his motivation for moving. Karen should stop Steven immediately to review the Q and A on WWREA brochure and ask him to sign the WWREA disclosure form. Tariq was on floor duty for his firm and received a call from a buyer interested in a property and had a few questions about the floor plan. After explaining the locations of the rooms, the buyer said thank you and hung up. Has first substantial contact occurred? No. Tariq only gave house details and the buyer did not offer any information related to price, ability, or motivation. Bella is moving to NC from California. She sent a Facebook message to Hudson, a local real estate agent, and began to ask questions about a home he has listed in regards to what the seller is willing to accept. Has first substantial contact occurred? Yes. The moment Bella inquired about what the seller would do, Hudson should have sent a message back to her to discuss the WWREA disclosure form and Q and A brochure. After going over the information, ***Hudson has no more than 3 calendar days to provide a copy of the form.*** The form is not designed to replace the review and explanation of agency by the broker, but rather to facilitate this explanation. The broker must keep a copy of the signed form on file for three years. (See Rule A.0108.)

Answer 239

Rule A.0104(e) also requires a seller's agent or subagent working with a prospective buyer to disclose, in writing at first substantial contact, the agency status of representing the seller. If first substantial contact occurs other than a face-to-face meeting where it is not practical to provide written disclosure, the broker shall immediately disclose by similar means whom he or she represents and shall immediately, but in no event later than three calendar days from the first substantial contact, mail or otherwise transmit a copy of the written disclosure to the buyer. Note that this written disclosure of seller agency or subagency to the prospective buyer is reflected in the form.

Answer 240

There is a special rule regarding agency disclosure in auction sales. Rule A.0104(g) states that providing the form to buyers does not apply to licensees representing sellers in auction sales transactions. However, A.0104(a) still applies: a written listing agreement between the seller and a broker is required from the outset of the relationship. Be aware that Rule A.0104 does apply in its entirety to licensees representing buyers in auction sales; in other words, licensees representing buyers must have reviewed the Working with Real Estate Agents form with their buyer-client and have a written buyer agency agreement with their client prior to submitting any bids. While licensees representing buyers in auction sales need not disclose their buyer agency status in writing to the seller at the time they bid, they must confirm it in writing "...no later than the time of execution of a written agreement memorializing the buyer's contract to purchase..." as per Rule A.0104(h). So auction licensees dont have to disclose when there selling someones property until its time to buy after the bidding is done The same goes for someone who is representing a buyer at an auction

Answer 241

nonexclusive

Answer 242

The WRITTEN buyer agency agreement does NOT have to be exclusive

Answer 243

Prior to switching to seller subagency, the oral buyer agent should consider entering into a written buyer agency agreement limited solely to that property, which few reasonable buyers should refuse.

Answer 244

Because a broker may work with a buyer under an oral buyer agency agreement, the rule of necessity also allows an agent to enter into an oral dual agency agreement that must also be put in writing no later than the time an offer is presented.

Answer 245

The agency disclosure form must be given to prospective sellers and buyers no later than first substantial contact in all real estate sales transactions. The broker must review the form and a determination of agency status must take place. The buyer/seller can acknowledge receipt by signing the form. Listing agreements are required to be in writing from the start of the agency relationship. The rule allows for an agent to act as a buyer's agent, a dual agent, or a designated dual agent under an oral agreement, until such time as the agreements must be put in writing, which is not later than the time the first offer is going to be presented. Any buyer agency agreement that sets forth agency exclusivity or a definite period of time must be in writing from the start of the agency relationship.

Answer 246

The answer is B. In this situation, because both the listing agreement and the buyer agency agreement already are in writing, oral consent to dual agency will not be sufficient. The buyer client must first authorize the company in writing to act as a dual agent, at least for this property, before the buyer may be shown the property. If the written buyer agency agreement had already authorized dual agency, then there would not have been any impediments to either showing the property or preparing and presenting an offer.

Answer 247

The answer is A. If the oral buyer agency agreement does not already authorize dual agency, the broker first must explain dual agency to the buyer and obtain the buyer's consent. Then before the broker may show the property, the broker first must contact its other principal, the seller, explain dual agency and obtain the seller's consent at least orally. If the seller refuses to consent, then the property may not be shown to the buyer client. Note: Even though the listing agreement already is in writing and does not authorize dual agency, the seller's oral consent to dual agency as to that buyer is sufficient only because the buyer agency agreement is still oral. If after viewing the property, the buyer wishes to make an offer, the buyer agency agreement first must be reduced to writing and must contain authorization for dual and/or designated agency before any offer is presented. Further, the seller's written consent to dual/designated agency, as least for this buyer, must be obtained before the offer may be presented. This may be done as an amendment to the listing agreement or as an addendum to the listing agreement, but it must be in writing before the offer is presented. Brokers are strongly advised to first obtain all necessary agency authorizations in writing before they prepare an offer. Otherwise, they may waste time preparing an offer they cannot present.

Answer 248

True An employer may pay certain benefits on behalf of its employees, but not its independent contractors, and generally will be required to pay unemployment compensation tax on the wages of its employees but not its independent contractors.

Answer 249

(1) The individual must have a current real estate license. (2) The individual must have a written contract with the broker containing the following clause: "The salesperson will not be treated as an employee with respect to the services performed by such salesperson as a real estate agent for federal tax purposes." (3) Ninety percent or more of the individual's income as a broker must be based on sales production and not on the number of hours worked. The broker should have a standardized agreement drawn up or reviewed by a lawyer to ensure its compliance with these federal dictates. The broker should also be aware that written agreements mean little to an IRS auditor if the actions of the parties are contrary to the document's provisions.

Answer 250

True While 1099 independent contracts are responsible for reporting their income and paying taxes on their own, an employer is responsible for taking care of reporting and paying taxes for W-2 employees.

Answer 251

B) disclosure.

Answer 252

B) Vacant lot

Answer 253

A) the relationship of trust between the agent and the principal.

Answer 254

A) The seller should send written notice to the principal broker of Joe's firm stating the seller’s intention to terminate the listing because of poor service. A listing is an agreement between the broker and the seller. An agency agreement may be terminated at any time for breach of the agreement, such as abandonment by the agent. The seller must contact the listing broker.

Answer 255

C) convince the seller to list with her and authorize dual agency. A real estate commission may be paid by any party in a transaction if agreed to by the parties. In this situation, the agent may receive her commission from the seller with the buyer-client's permission without having to acquire a listing on the property and creating a dual agency relationship.

Answer 256

A) To provide specific agency disclosures in writing This is an effort to inform and protect the public. North Carolina licensees also avoid the type of liability incurred for practicing undisclosed dual agency.

Answer 257

C) the agent. A customer would have a nonagency relationship under this description.

Answer 258

D) must be reduced to writing before presentation of the first offer. The written authority for dual agency must be in writing not later than the time that one of the parties represented by the broker makes an offer to purchase, sell, rent, lease, or exchange real estate to another party.

Answer 259

A) death of the individual listing licensee. If the individual listing agent dies, the listing would not be terminated because the listing belongs to the brokerage firm rather than to the deceased listing agent.

Answer 260

B) Case law establishing the responsibilities of a person who acts for another The common law of agency is based on court cases involving the responsibilities of persons who act for others and establishes specific duties that define how agents treat their clients.

Answer 261

B) discussing any of the buyer’s confidential information. Disclosure of agency representation must be before the consumer is put at a disadvantage by disclosing confidential information.

Answer 262

B) revise its agency rule to require licensees to provide specific agency disclosures in writing. Today's consumers are much more likely to receive information about agency relationships early in their dealings with brokers. They are also likely to have much more choice in whether they are going to be represented or not.

Answer 263

C) not alter the common-law concept. In 1995, the Edina Realty case prompted the North Carolina Real Estate Commission (NCREC) to revise its agency rule.

Answer 264

C) disclosure of material facts. When dealing with third parties, agents must still comply with North Carolina Real Estate License Law and NCREC rules, including disclosure of material facts relating to a property or a transaction about which the agent has knowledge or should reasonably have acquired knowledge.

Answer 265

C) The form is required in all commercial sales transactions.

Answer 266

B) accounting, and reasonable skill, care, and diligence.

Answer 267

B) A real estate licensee usually acts as a general agent of an affiliated firm. A real estate licensee working under the broker-in-charge acts as a general agent of the broker-in-charge and the affiliated firm. A general agent is one whom a principal, in this case the broker-in-charge, authorizes the agent to conduct any of the acts related to a particular job or the specific business of the principal.

Answer 268

(1) be signed by all parties; (2) include the broker's real estate license number; (3) have a definite termination date; and (4) contain the prescribed nondiscrimination provision

Answer 269

if sellers did not originally give permission for dual or designated dual agency in the listing agreement and the buyer agency agreement has not been reduced to writing, the sellers can orally amend their written listing agreements to authorize either type of dual agency at a later date. This oral consent to dual agency must be reduced to writing prior to submission of the first offer on the property.

Answer 270

Article 16 of the REALTOR® Code of Ethics prohibits members of the National Association of REALTORS® from the solicitation of business from a consumer that is party to an active exclusive agency agreement with another REALTOR®.

Answer 271

it is a list of telephone numbers from consumers who have indicated their preference to limit the telemarketing calls they receive The registry applies to any plan, program, or campaign to sell goods or services through interstate phone calls. The registry does not limit calls by political organizations, charities, or telephone surveyors. A real estate broker may call a consumer with whom they have an established business relationship for up to 18 months after the consumer's last purchase, delivery, or payment, even if the consumer is listed on the National Do Not Call Registry. A broker also may call a consumer for up to three months after the consumer makes an inquiry or submits an application. Note that if a consumer asks a company not to call, even if there is an established business relationship, the company must abide by the consumer's wishes. Real estate brokers are prohibited from calling registered owners of for-sale-by-owner properties or owners of expired listings with another firm since these solicitation scenarios are subject to the Act. On the other hand, a buyer's agent may call for sale by owners that are on the Registry if the buyer-client is interested in the property. Telemarketers and sellers are now required to search the registry at least once every 31 days and drop registered consumer phone numbers from their call lists. North Carolina's do-not-call statute mirrors the federal rules and piggybacks on the federal registry. Penalties on the federal level are up to $11,000 per call and North Carolina fines range from $500 to $5,000 depending on the violation. None of these do-not-contact laws prohibits real estate licensees from canvassing for business or soliciting clients by using postal mail or going door-to-door.

Answer 272

A North Carolina broker can share a brokerage fee with a broker from another state if that broker is actively licensed in the state from which he is making the referral and does not physically enter the state to engage in brokerage activity that requires a North Carolina real estate license. Generally, such a situation would result in a referral fee being paid to the out-of-state broker for referring a buyer or seller client to the North Carolina broker. (Most states require referral fees to be paid to the firm who then pays the referring broker or salesperson.) The reverse holds true in that the North Carolina broker can receive compensation for referring brokerage business to an active broker in another state, as long as the North Carolina broker physically stays out of the state of the broker that received the referral. A North Carolina broker should secure a written compensation agreement and not assume that the out-of-state broker can or will be able to pay them. To be eligible to receive a referral fee, the broker must have a current, active North Carolina license at the time of making the referral. These fees must usually be paid to the out-of-state broker's firm and not directly to the out-of-state broker.

Answer 273

Generally, these laws prohibit monopolies and contracts, combinations, and conspiracies that unreasonably restrain trade. The most common antitrust violations are price fixing, group boycotting, and allocation of customers or markets.

Answer 274

criminal offense

Answer 275

(1) assuring that all brokers affiliated with the office are maintaining current, active licenses and are maintaining up-to-date information in Commission records; (2) notifying the Commission of company name or address changes; (3) advertising; (4) maintaining trust/escrow account(s); (5) retaining records; (6) supervising provisional brokers; (7) ensuring that all affiliated brokers adher to agency agreement and disclosure requirements; and (8) notifying the Commission in writing that they are no longer serving as BIC of a particular office within 10 days following any such change.

Answer 276

1) have consisted of at least 75 hours of instruction [no partial credit granted]; 2) have been completed within one (1) year prior to North Carolina license application and while the applicant was a resident of the other state; and 3) be parallel to the topics and timings described in the Commission’s Prelicensing course syllabus. Required Documentation: A course completion certificate or transcript evidencing the successful completion of a prelicensing education program that meets the requirements stated in Rule 58A .0304.

Answer 277

Per Commission Rule 58A .0304, to qualify for such waiver, the applicant must have a baccalaureate or higher degree in the field of real estate, real estate brokerage, real estate finance, real estate development, or a law degree conferred on the applicant from any college or university accredited by a college accrediting body recognized by the U. S. Department of Education. Required Documentation: A transcript evidencing the successful completion of a baccalaureate or higher degree that meets the requirements stated in 58A .0304.

Answer 278

EITHER 1) submit an application, including criminal record report, certification(s) of licensure, and application fee, 2) pass the State portion of the NC license examination, and 3) be issued a provisional broker license (assuming NC requisite character requirements are met) and be subject to the Postlicensing education requirement; OR 1) submit an application, including criminal record report, certification(s) of licensure, and application fee, and 2) be issued a provisional broker license (assuming requisite character requirements are met) and be subject to the Postlicensing education* requirement. *Please note that provisional brokers who applied for an NC license based on licensure in another jurisdiction and who opted not to take the State section of the NC license examination are NOT eligible for any waiver of Postlicensing education under Rule 58A .1905. An applicant who holds a current real estate license in another state (or U.S. territory or Canadian jurisdiction) that is equivalent to NC’s “full” broker license and that has been on active status within the previous three (3) years may EITHER 1) submit an application, including criminal record report, certification(s) of licensure, and application fee, 2) pass the State portion of the NC license examination, and Real Estate Licensing in North Carolina 7 3) be issued a “full” broker license (assuming requisite character requirements are met); OR 1) submit an application, including criminal record report, certification(s) of licensure, and application fee, and 2) be issued a provisional broker license (assuming requisite character requirements are met) and be subject to the Postlicensing education* requirement. *Please note that provisional brokers who applied for an NC license based on licensure in another jurisdiction and who opted not to take the State section of the license examination are NOT eligible for any waiver of Postlicensing education under Rule 58A .1905. Required Documentation: Official Certification of Licensure is required from the licensing agency in the state or jurisdiction in which the applicant is currently licensed. The certification must have been issued within the six (6) months immediately preceding the application and must indicate the license (and status) history and any disciplinary action taken or complaints pending against the applicant. A copy of the applicant’s real estate license certificate or pocket identification card is not acceptable. Proof of education is not required. NOTE: In order for an applicant to qualify for NC licensure based on option #4, the certification of licensure must show that the applicant still holds the license in the other jurisdiction at the time of application to NC, and that the license in the other jurisdiction was on active status at sometime within the three (3) year period prior to application to NC. See Commission Rule 58A .0511.

Answer 279

If a qualified applicant files a complete application, schedules and takes the examination promptly after receiving Notice of Exam Eligibility, passes the examination on the first attempt, and has no character issues, the entire application-examination-licensing process may be completed in as little as ten (10) days. The process may be slowed by many factors, such as filing an incomplete application or not passing the required examination section(s) on the first attempt. However, the main factor that slows the process is the character review process. (See Consideration of Applicant’s Character.)

Answer 280

the practice of setting prices for products or services rather than letting competition in the open market establish those prices. In real estate it occurs when brokers agree to set sales commissions, fees, or management rates, and it is illegal. Brokers must independently determine commission rates or fees only for their own firms. These decisions must be based on the broker's business judgment and revenue requirements without input from other brokers.

Answer 281

Multiple-listing organizations, Association or Boards of REALTORS®, and other professional organizations may not set fees or commission splits. Nor are they allowed to deny membership to brokers based on the fees the brokers charge. Either practice could lead the public to believe that the industry sanctions not only the unethical practice of withholding cooperation from certain brokers but also the illegal practice of restricting open-market competition.

Answer 282

occurs when two or more businesses conspire against other businesses or agree to withhold their patronage to reduce competition. Group boycotting is illegal under the antitrust laws.

Answer 283

involves an agreement between brokers to divide their markets and refrain from competing with each other for business. Allocations have been made on a geographic basis, with brokers agreeing to specific territories within which they will operate exclusively. The division might occur by markets, such as by price range. These agreements conspire to eliminate competition and are illegal.

Answer 284

The penalties for such acts are severe. For example, under the federal Sherman Antitrust Act, people who are found guilty of fixing prices or allocating markets may be punishable by a maximum $100,000 fine and three years in prison. For corporations, the penalty may be as high as $1 million. In a civil suit, a person who has suffered a loss because of the antitrust activities of a guilty party may recover triple the value of the actual damages plus attorney's fees and costs.

Answer 285

broker's principal Timely disclosure must be confirmed in writing prior to making or accepting any offer.

Answer 286

has a change of mind and refuses to sell, has a spouse who refuses to sign the deed, has a title with uncorrected defects, commits fraud with respect to the transaction, is unable to deliver possession within a reasonable time, insists on terms not in the listing, or has a mutual agreement with the buyer to cancel the transaction. In other words, a listing broker generally is due a commission if a sale is not consummated because of the principal's unjustified default. Even if the buyer backs out without legal cause after the seller has accepted the offer, the broker may be entitled to a commission, but collecting it may be difficult. To be considered the ***procuring cause*** of sale, the broker must have taken action to start (or cause) an unbroken chain of events that resulted in the sale. In North Carolina, a broker who causes or completes such action without a written agency contract that promises compensation is deemed a volunteer and has no legal claim to compensation (N.C.G.S. § 93A-13).

Answer 287

Copy of seller's deed Copy of survey (if available) Copy of protective covenants and homeowners' association information (including dues and assessments) Balance due on seller's mortgage(s) and status of mortgage(s)

Answer 288

inspect prospective seller's property and prepare listing data sheet, noting all significant features and defects; identify personal property to be transferred and fixtures not to be conveyed; suggest needed repairs, improvements, staging, etc.; make sure listing data is accurate and complete; inquire about construction/alteration/repair permits; inquire about septic system capacity/permit (if property has onsite septic system); determine if a potential short sale situation exists; verify acreage of lot/parcel from seller's deed and/or survey; verify and properly report building square footage; and discuss marketing plan and brokerage fee.

Answer 289

is typically an amount of compensation, usually paid up front by the buyer/client when the buyer agency agreement is established. A buyer agent must enter into a written buyer agency agreement with a buyer-client before receiving a retainer fee. This fee is advanced partial compensation for services.

Answer 290

is due and payable by the buyer/principal on the signing and acceptance of an offer to purchase property found by the buyer's agent. Typically, however, it is actually paid at closing. The buyer agency agreement normally states that the buyer's agent will first try to recover the success fee from the listing firm via the cooperative agreement, and if unsuccessful, then from the buyer. If, after entering into a written buyer agency agreement, a buyer purchases a property without the involvement of the buyer agent, the buyer agent may be able to recover compensation from the buyer-client if the written buyer agency agreement indicates that the buyer will pay the buyer agent in the event that the seller or seller's agent is unable or unwilling to do so.

Answer 291

A 2011 North Carolina law allows a real estate broker with a written agency agreement to represent a property owner in a commercial transaction to place a lien on the property to be sold or leased to protect the broker's commission. The lien must be filed in a sales transaction after the broker has fully performed but before closing; in a lease transaction, the broker has up to 90 days after tenant possession to file the lien. The lien must be satisfied within 18 months and is inferior to all mechanics' liens.

Answer 292

a co-brokered sale, the amount of compensation paid by the listing firm to the selling firm is negotiable; however, firms that participate in an MLS routinely disclose the amount of compensation that will paid to a successful selling firm.

Answer 293

In a co-listing, brokerage firms team up to sell a property in order to obtain more exposure for that listing. For example, a property may be listed close to a county border. ABC Realty wishes to find buyers in the adjoining county but does not have the same degree of access as its competitor MNO Realty does. MNO Realty is located in the adjoining county. If ABC and MNO co-venture on this listing, they will also share in the listing commission if they are successful in finding a buyer who is ready, willing, and able.

Answer 294

(1) open listing, (2) exclusive-agency listing, and (3) exclusive right-to-sell listing.

Answer 295

In an open listing, the seller retains the right to employ any number of brokers as agents; it is a nonexclusive type of listing. The brokers can act simultaneously, but the seller is obligated to pay a commission only to that broker who successfully procures a ready, willing, and able buyer. Additionally, if the seller personally sells the property without the aid of any of the brokers, the seller is not obligated to pay any broker a commission; the seller can compete with the agents for the commission. If the owner or any of the brokers sell the property, all other open listing agreements on that property will terminate the authority given to those brokers. A broker who was in any way a procuring cause of the transaction, however, may be entitled to a commission if the procuring cause of sale can be proved. This type of listing agreement is not favored by brokers; moreover, MLS rules may prohibit this type of listing from being placed in this resource.

Answer 296

In an exclusive-agency listing, one broker is specifically authorized to act as the exclusive agent of the principal. However, the seller under this form of agreement retains the right to personally sell the property, without obligation to the broker; the seller can compete with the agent to save the commission. If the seller sells through his or her own efforts, the exclusive agency of the broker is automatically terminated. The seller is obligated to pay a commission to the broker if the broker has been the procuring cause of a sale. The listing brokerage can also offer and pay a co-op fee to another brokerage to bring a buyer. In which case, both firms would be paid. This type of listing may be acceptable to MLSs. However, brokers should exercise caution when handling such listings since prospective buyers may become confused about whether to deal with the seller/owner or a broker. Sometimes, sellers offer different terms of sale, depending on whether the seller is dealing directly with a buyer or with a buyer procured by a broker.

Answer 297

In an exclusive right-to-sell listing, one brokerage firm is appointed as sole exclusive agent of the seller and is given the exclusive right, or authorization, to represent the property in question. Under this form of listing contract, the seller must pay the broker a commission, regardless of who sells the property, if it is sold while the listing agreement is in effect. In other words, no matter whether the listing firm, a cooperating firm or the seller himself finds the buyer, the seller still must pay the broker a commission. In real estate, this is the most common form of listing agreement and the most preferred form for brokers. Please note that the listing agreement contains specific language stating that the broker is entitled to the commission regardless of who actually sells the property. The term exclusive right to sell does not imply that the broker has the authority to enter into a sales contract on behalf of the property owner. The listing agreement is not an offer to sell the property; it is an employment agreement. The seller cannot be forced to sell the property even if the offer matches the terms of the listing agreement exactly; however, the seller may be required to pay the earned commission to the broker.

Answer 298

When a particular property is not currently listed with any real estate brokerage firm, a buyer agent may use a protection agreement to secure a commission if that particular property is purchased by the buyer agent's buyer-client. Such an agreement does not create a general listing or any agency relationship between the seller and the buyer agent. The agreement does not create a general listing. IN PRACTICE The North Carolina REALTORS® created the Unrepresented Seller Disclosure and Fee Agreement to address required agency disclosure to property owners selling their own property and compensation by property owners to a buyer's agent. EXAMPLE A broker may use a protection agreement when she has a buyer-client who is interested in a specific type of property. The broker knows this buyer would be interested in a particular house that is "For Sale by Owner." However, the broker does not want to suggest that the buyer view the house because the broker could lose the opportunity to earn a commission. Instead, the broker might first approach the homeowner/seller and ask whether he would agree to pay her a commission if her client decided to purchase the home.

Answer 299

Fee-for-services agreement

Answer 300

Helping the seller prepare the property for sale Performing a comparative market analysis (CMA) and pricing the property Assisting with marketing the property using the MLS and any other websites Locating and screening a buyer Completing an offer to purchase agreement and helping with negotiations Assisting with closing a transaction A consultant may offer other services to a buyer. For example, a consultant may offer a buyer the following services: Consulting on renting versus owning Helping a buyer with a mortgage preapproval Consulting on a buyer's desired location Visiting properties with a buyer and checking property information Completing an offer to purchase agreement and helping with negotiations Assisting with closing a transaction

Answer 301

Under this provision, the commission is divided between the listing broker and the selling broker, regardless of which party the selling broker represents. ***MLS*** Under most MLS contracts, the broker who secures a listing is not only authorized but obligated to submit the listing to the MLS within a definite period of time so that it can be distributed to the other member brokers. The length of time during which the listing broker can offer the property exclusively without notifying the other member brokers varies by REALTOR® board.

Answer 302

profile; data sheet This information generally includes the following (where appropriate): Names, addresses, and relationship, if any, of the owners Legal description of the property Size of the improvements (square footage) Age of the improvements and their type of construction Number and general dimensions of rooms Lot size (frontage and depth) as well as information concerning the facilities, services, and institutions (e.g., schools, parks and recreational areas, churches, public transportation) available in the neighborhood where the property is located (frontage is defined in "Math FAQs") Information on any existing loans, including name and address of each lender; type of loan; loan number; loan balance; interest rate; monthly payment and what it includes (principal, interest, real estate tax impounds, hazard insurance impounds, mortgage insurance premiums); whether the loan may be assumed by the buyer and, if so, under what circumstances; whether the loan may be prepaid without penalty; and so forth Possibility of seller financing Amount of any outstanding special assessments and whether they will be paid by the seller or assumed by the buyer Zoning classification of the property Current (or most recent year's) property taxes Any real property to be removed from the premises by the seller and any personal property to be included in the sale for the buyer (both the listing contract and the subsequent purchase contract should be explicit on these points) Any additional information that would make the property appealing and marketable Any required disclosures concerning agency representation, property condition, known defects in the property, and the like

Answer 303

Agency disclosure must happen before a broker begins to gather information to complete a listing agreement.

Answer 304

Anyone who has an ownership interest in the property must be identified and should sign the listing to validate it. If the property is owned under some form of co-ownership, that fact should be clearly established. (See Unit 2.) If one or more of the owners is married, the spouse's consent and signature on the contract to release any marital rights is required. If the property is in the possession of a tenant, that should be disclosed (along with the terms of the tenancy), and instructions should be included on how the property is to be shown to prospective buyers.

Answer 305

provides that the property owner will pay the listing broker a commission if, within a specified number of days after the listing expires, the owner sells, rents, leases, or options the property to or exchanges the property with someone the owner originally met or made contact with through the broker. This clause protects the broker who introduces two parties and is the procuring cause of a sale, only to have the parties intentionally delay entering into a contract and complete the transaction after the listing expires.

Answer 306

usually parallels the terms of the listing agreement; for example, a six-month listing might carry a broker protection clause of six months after the listing's expiration. To enforce this clause, the listing broker must provide the seller, within a specified time, the names of potential buyers who looked at the property during the listing period. However, to protect the owner and prevent owner liability for two separate commissions, most of these clauses stipulate that they cannot be enforced if the property is listed under a new listing agreement, either with the original listing broker or with another broker.

Answer 307

Without written consent of the seller, the broker cannot undertake any marketing activities. If the seller does not wish to have the property advertised via the internet, which has become a prime advertising tool, they must opt-out of this service by signing an Internet Advertising Addendum and attach it to the listing agreement.

Answer 308

ceilings must be at least 7 ft except under beams, ducts, etc., where the height must be 6'4 Also, in rooms with sloped ceilings (finished attics, bonus rooms, etc.), the portion of the room with a ceiling height of at least 5 feet may be included as living area if at least half one-half of the finished area of the room has a ceiling height of at least 7 feet.

Answer 309

is defined as space on any level of a dwelling which has living area and no earth adjacent to any exterior wall on that level. Space that is "at" or "on grade" is considered "above-grade."

Answer 310

is space on any level which has living area, is accessible by interior stairs, and has earth adjacent to any exterior wall on that level. If earth is adjacent to any portion of a wall, the entire level is considered "below-grade."

Answer 311

NCREC guidelines address interior space as well. They state when interior space that is open from the floor of one level to the ceiling of the next higher level to include in the square footage for the lower level only. However, any area occupied by interior balconies, lofts, etc. on the upper level or stairs that extend to the upper level is included in the square footage for the upper level.

Answer 312

six inches When measuring attached housing such as town houses, duplexes, and condominiums, additional measuring challenges may be encountered. Per the NCREC Residential Square Footage Guidelines, a broker should add six inches for the common walls in town houses or duplexes, but add nothing for exterior walls in condos, since the unit does not include the exterior walls. Any deviations, alterations, or changes should be given special mention.

Answer 313

Completion or fulfillment of the purpose for which the agency was created (the best way to terminate a listing) Expiration of the terms of the agency Mutual agreement to terminate the agency Breach by one of the parties, such as abandonment by the agent or revocation by the principal (The breaching party might be liable for damages.) By operation of law, as in bankruptcy of the principal (because title to the property would be transferred to a court-appointed receiver) Destruction or condemnation of the property Death or incapacity of either party (Notice of death is not necessary. Note that if a property is listed with a brokerage firm and the listing agent dies, the listing would not be terminated because the listing belongs to the firm.)

Answer 314

The most common exclusions that real estate brokers will encounter are new construction that has never been inhabited, foreclosure sales, and any rent-to-own scenarios The statement must be given to the buyer no later than the time the buyer makes an offer on the property. The property disclosure statement may be included in the sales contract, in an addendum to the contract, or in a separate document. The form is a state-mandated form and must be used when required. No other form can be substituted. Additional forms may be used, however, such as a copy of a home inspection. The statement includes disclosures about items relative to the condition of the property about which the owner has actual knowledge. In addition to existing questions about property condition, the property owner is asked if the property to be conveyed is subject to any owners' associations and governing documents that impose various mandatory covenants, conditions, and restrictions upon the lot, including, but not limited to, obligations to pay regular assessments or dues and special assessments. If the property owner answers "yes" to the existence of owners' associations or governing documents, the owner must answer the four remaining questions on the disclosure statement. The Residential Property Disclosure Act also allows the owner to make no representations as to the condition of the property except as otherwise provided in the purchase and sale agreement. As befits a caveat emptor state, an owner who decides to make no representation as to the condition of the property has no duty to disclose those defects, whether or not the owner knows about them. ---------------------------------------------------------------------------------------------------- If the property owner does not deliver the disclosure statement to the buyer prior to or at the time the purchaser makes an offer, the purchaser may cancel, or rescind, any resulting real estate contract. North Carolina G.S. 47E-5(b) addresses the buyer's right of rescission as follows: The purchaser's right to cancel shall expire if not exercised prior to the following, whichever occurs first: 1. The end of the third calendar day following the purchaser's receipt of the disclosure statement 2. The end of the third calendar day following the date the contract was made 3. Settlement or occupancy by the purchaser in the case of a sale or exchange 4. Settlement in the case of a purchase pursuant to a lease with option to purchase If the buyer decides to rescind the sales contract, the buyer must give the seller written notice of the withdrawal within the three-day period. The buyer who exercises this rescission right is entitled to a full refund of any deposit monies given to the seller. In addition, a residential seller must disclose what he/she knows about the presence of lead-based paint in the property and must provide any known reports about lead-based paint hazards in the property, as required under the Residential Lead-Based Paint Hazard Reduction Act. Although brokers are prohibited from actually completing the form, they can provide insight and advice to the seller. The broker should also assist the seller in providing a complete and up-to-date form to the buyer or their agent. It is common practice around the state for this disclosure form to be available in the listed property and/or as an additional page of information on the MLS listing. All brokers in the transaction, regardless of whom they represent, have an obligation to ensure the delivery of the mandated form to the buyer in a timely manner.

Answer 315

North Carolina requires owners to disclose to prospective buyers, even before an offer is made, whether or not the mineral and/or oil and gas rights have been severed from the property. The Mineral and Oil and Gas Rights Mandatory Disclosure Statement requires the current property owner to disclose whether the mineral and/or oil and gas rights were severed from the property by the previous owner, by the current owner, and whether the current owner intends to sever the rights from the property prior to transfer of title to the buyer. If the owner does not provide the disclosure to the prospective buyer before the offer is made, the buyer may, under certain conditions, be able to cancel the contract without penalty, by personally delivering or mailing written notice to cancel to the owner or owner's agent within three calendar days of receiving the disclosure, or three calendar days following the date the contract was executed, whichever occurs first. The new law applies to any sales contracts in covered transactions entered into, on, or after January 1, 2015. The following transactions are subject to the Mineral and Oil and Gas Rights Mandatory Disclosure Statement (MOGS): - Sales subject to the Residential Property Disclosure Act (i.e., selling residential property consisting of not less than one nor more than four dwelling units) - The first sale of a dwelling never inhabited (i.e., new construction) - A lease with option to purchase where the lessee occupies the dwelling - Sale of residential property where the parties agree not to complete a Residential Property and Owner Association Disclosure Statement (RPOADS) The last three transactions listed are exempt from providing the RPOADS, but owner/sellers of such property nonetheless must provide the MOGS Disclosure to prospective buyers. The MOGS form lists the transactions to which it applies in the first two paragraphs. Owners of residential property falling within any of the four categories must provide the MOGS to the buyer no later than the time the buyer makes an offer. The disclosure statement must be signed by the seller, and the buyer(s) should also sign the form merely to acknowledge its receipt. The owner is required to separately disclose as to 1) mineral rights and 2) oil and gas rights whether: - any previous owner has severed the mineral or oil and gas rights, - the current owner has severed either mineral or oil and gas rights, or - the current owner intends to sever either mineral or oil and gas rights prior to transferring the property to the purchaser. Unlike the RPOADS where the owner may check no representation for each question, the only question on the MOGS that permits a no representation response asks whether a previous owner has severed either mineral or oil and gas rights. As to whether the current owner has severed or plans to sever the rights, the owner must answer either "yes" or "no." Ironically, this MOGS does not apply to sales of vacant land, in part because the General Assembly chose to insert the disclosure requirement into the Residential Property Disclosure Act. That Act only applies to sales of residential property containing one to four dwelling units. Failure to provide either the RPOADS or MOGS when required allows the buyer to cancel the contract by hand delivering or mailing written notice of cancellation to the seller or seller's agent within three calendar days of contract formation or three calendar days following receipt of the disclosure, whichever deadline first occurs. A buyer will not be penalized for cancelling the contract in a timely fashion and will be entitled to a refund of any deposit the purchaser may have paid.

Answer 316

False There are exceptions to the requirement that residential sellers must provide the disclosure statement. For example, owners of properties that are greater than four units do not have to provide this form and sellers of brand-new homes that have not been occupied.

Answer 317

True A buyer's agent may be compensated by either the buyer or the seller. Issues of compensation are always negotiable.

Answer 318

If the buyer-consumer chooses not to be represented by any type of buyer agency, after proper review by the broker of all agency choices in the Working with Real Estate Agents form, the broker should indicate Unrepresented Buyer (Seller subagent) on the form. Assuming the seller will allow seller subagency in this situation, the broker is in a fiduciary relationship with the seller, not the buyer; therefore, the buyer should be very careful what information is shared with the broker who must communicate everything to the seller-client. The buyer-consumer should fully grasp the fact that while a broker acting as a seller's subagent must deal fairly and honestly with the buyer, this interaction falls far short of a buyer's agent's fiduciary relationship that must promote the buyer's best interest. If the buyer will not authorize buyer agency or seller subagency, the broker cannot continue to work with the buyer; there is no legal alternative. In today's real estate practice, a listing firm and seller may refuse to offer seller subagency to other firms and only co-broker transactions with firms acting as a buyer's agent. The listings of such firms cannot be shown by a broker acting as a seller's subagent. The buyer-consumer would have to enter into a buyer agency agreement with the broker, at least for that property. Sometimes a buyer-consumer may decide after working for a while with a broker as a seller's subagent that the buyer-consumer would like to switch to a buyer's agency relationship with the broker. Any confidential information about the seller-client learned by the agent while acting as a seller's subagent must be disclosed to the seller when asking for permission to change the agency relationship. Although this shift in agency allegiances can be done with the fully informed consent of the seller, it is strongly discouraged.

Answer 319

the buyer does not have exclusive representation from one particular agent. The potential buyer is free to enter into other buyer-agency contracts with other brokers/firms. This also frees the buyer to view and purchase property through a seller's subagent or to purchase property directly from a property owner. Buyer will only be obligated to compensate the broker if the buyer's broker is the procuring cause of the purchase buyer agent compensation under this type of contract may involve a retainer fee or success fee, as previously discussed.

Answer 320

NCREC Rule A.0104(a) permits licensees to work initially as a buyer or tenant agent under an express oral buyer agency agreement. After proper review of agency options in the Working with Real Estate Agents form, a buyer/tenant consumer may wish representation but elect to postpone the execution of a written agency agreement. (Reminder: All agency agreements with property owners must be in writing from inception.) Minimally, the oral agreement should address issues of compensation and whether the client authorizes dual agency, if the situation arises. All oral buyer/tenant agency agreements must be nonexclusive, which means the client may work with other agents or independently and the relationship may be terminated by the agent or the client with notice at any time. Any oral agency agreement must, by NCREC Rule, be open-ended with no definite termination date. An agent shall not continue to act as a buyer or tenant agent if the client refuses to enter into a written agency agreement when required by the rule. If the client refuses to reduce the oral agency to writing, the only way the agent can go forward in the transaction is if the client will allow the agent to switch to acting as a seller's subagent. The NCREC strongly recommends that the broker send the client a letter that confirms the terms of the verbal agreement, including dual agency authorization if approved. Termination of oral agency may be tendered verbally; although follow-up written communication is recommended. Firms do not have to allow oral buyer/tenant agency; it is only an agency option.

Answer 321

Under this type of buyer-agency contract, one broker/firm is selected by a potential buyer to represent him or her in the purchase of a property on an exclusive basis. The buyer agrees not to work with any other broker/firm in the purchase of a property. The employed broker is the only real estate firm with whom the buyer can work to locate and purchase property. When the buyer has signed an exclusive buyer-agency contract, all agents working for that firm become subagents of that buyer. The buyer, however, may not be restricted from buying directly from a property owner, but language in the contract can still require the buyer to pay the broker a success fee. Some buyers who are resistant to an exclusive agency agreement may be more willing to sign if the agreement is short in time duration (i.e., a day, two weeks, or a month) or limited to named properties. A buyer agency agreement terminates automatically on the date stated in the agreement, unless renewed by that expiration date.

Answer 322

initial contact Any expected compensation by the seller or the listing firm should also be clarified by the time of the showing by obtaining a cooperation agreement with the listing company, if needed.

Answer 323

give and review the Working with Real Estate Agents form with the buyer; explain agency duties and responsibilities; ensure that a proper agency contract is executed; properly qualify the prospective buyer/client (preferable approach is by a mortgage loan officer); obtain and verify information about the property, including, if applicable, the Residential Property and Owners' Association Disclosure Statement, the Mineral and Oil and Gas Rights Mandatory Disclosure Statement, the Lead-based Paint Addendum, and the Owner Association Disclosure and Addendum, etc.; disclose agency status to all parties to the transaction; show properties that meet the requirements of the buyer; discover and disclose material facts about the property; perform a CMA to assist buyer in determining an appropriate offer price; assist in the preparation, presentation, and negotiation of offers submitted by and on behalf of the buyer/client; and assist the buyer/client with preparation for closing the transaction.

Answer 324

a for sale by owner (FSBO) or a property listed with a limited service real estate firm that directs all property inquiries to the property owner

Answer 325

Brokers and buyers can also discuss and negotiate the possibilities of limiting representation to a defined duration as well as to specific properties. Unless otherwise noted in the agency agreement, the buyer authorizes the broker to disclose the buyer's name(s) as necessary. The buyer also is advised that although brokers are prohibited from disclosing terms of any offer without the express permission of the offering party, the seller is under no such restriction.

Answer 326

no later than the making of the first offer

Answer 327

The dual agency provisions on all North Carolina REALTORS® agency agreements seek to modify and limit the duties of the agent to the principals. Both of the firm's clients are responsible for making their own decisions during the transaction. When acting as a traditional dual agent, the firm's brokers typically are absolved by the language in the dual agency agreement from sharing confidential information about either party with the other as would be required under common law agency fiduciary duties. Dual agents must still discover and disclose all material facts but not personal information, which does not affect contract performance by either client.

Answer 328

Voluntary—no one may be forced into a contract An agreement or a promise—a contract is essentially a legally enforceable promise Made by legally competent parties—the parties must be viewed by the law as capable of making a legally binding promise Supported by legal consideration—a contract must be supported by some valuable thing that induces a party to enter into a contract and that must be legally sufficient to support a contract About a legal act—no one may make an enforceable contract to do something illegal

Answer 329

parties state the terms and show their intentions in words to that effect. An express contract may be either oral or written.

Answer 330

the agreement of the parties is demonstrated by their actions or conduct.

Answer 331

exists when something remains to be done by one or both parties.

Answer 332

is one in which all parties have fulfilled their promises and therefore, fully performed the contract, such as a sales contract that has closed. (Do not be confused by the fact that the word execute is also used to refer to the signing of a contract.)

Answer 333

meeting of the minds

Answer 334

Doing anything wrong will get your license status put as inactive. BUT if you forget to renew your license by forgetting to pay the fee each year (between May 15th to june 30th) which is $45, then your licenses will become expired. And expired is the only thing that will make you have to retake this class again.

Answer 335

You have to have the CE class taken by june 10th but it doesnt go inactive until July 1

Answer 336

3 A’s advertising Active status Agency agreements 2 T’s Trust accounts Transaction records

Answer 337

Nonprovisinal broker Must have 2 years of active Full Time (4000 hours) real estate experience within the previous 5 years Must take a 12 hour BIC course from the NC real estate commission in the first 120 days after they become the BIC

Answer 338

Composed of 9 members that are not paid and appointed for 3 year terms 7 are appointed by the governor 1 each appointed by the north carolina house and nc senate At least 3 must have a real estate license At least 2 must NOT have a real estate license

Answer 339

Reprimand license Suspend license Revoke license Fine time share developers for violations by the Developer or someone selling on their behalf May naver fine licensee May investigate those who are practicing real estate without a license ans get an injunction forcing them to stop Can refer people to district attorney for criminal prosecution

Answer 340

Violating any commission rule Practicing law- drafting documents or giving legal responses Self dealing- doing something to help ones self ahead of the client Broker may not represent the buyer when broker is the seller Misrepresentation or omission of Material facts

Answer 341

Contracts signed by a person under duress or undue influence are voidable by that person or by a court. Extreme care should be taken when one or more of the parties to a contract are elderly, sick, in great distress, or under the influence of alcohol or drugs, both legal and illegal. To be valid, every contract must be signed as the free and voluntary act of each party. Misrepresentation, fraud, or mistake of fact could render a contract voidable by the injured party. In the absence of these factors, reality of consent has been reached.

Answer 342

A contract may be voidable if the mistake of fact involves a material term, is mutual and is not the result of fraud or negligence. However, a unilateral mistake of fact does not release parties from their obligations. EXAMPLE: Tammy negotiates with Keith to purchase a tract of vacant land Keith owns. Keith honestly believes and tells Tammy that the tract contains 145 acres. Tammy relies on Keith's representations and the parties sign a contract. Prior to settlement, it is discovered that the tract contains only 120 acres. The contract most likely will be held voidable a Tammy's election due to the magnitude of the mistake relating to a material term that both parties mistakenly believed.

Answer 343

Unlike mutual mistakes of material fact, mistake of law does not excuse a party's obligations under a contract. The reason is because everyone is presumed to know the law. EXAMPLE: The case of Willis v. Willis in which a widow created a will but later signed a warranty deed conveying real property she owned to one of her children, reserving a life estate for herself. The grantee child died before their mother and at this point the mother wanted to deed the property to one of her other children. Had she devised the property to her child, she could have changed the terms of her will. Once she conveyed the property to her son by deed, she could not later change her mind and rescind the deed. The North Carolina Supreme Court held that a unilateral mistake by the grantor as to the law will not support reformation of a deed.

Answer 344

If a party or a party's agent engages in fraud, then any resulting contract may be voidable at the option of the party being deceived. The elements of fraud include: either a false representation or nondisclosure of a material face; made with knowledge of its falsity or in reckless disregard of its truth; with the intent that it be acted upon by the other party, and; that is acted upon by that party to their injury. Fraud does not automatically make a contract absolutely void. The defrauded party has the option to avoid the contract or to enforce it. EXAMPLE: Jeff, a listing broker, tells an interested buyer that the developer is working with the county to pave the gravel road leading into the subdivision. The developer has stated to Jeff that they will never pave the road and now refused to pave the road. Jeff did not make this statement regarding the road to any other potential buyers who did not ask about the road. If Jeff's misrepresentation induced this buyer to purchase the lot, the buyer may bring an action for damages because the lot is worth less with a gravel road than a paved road. Also, the buyer may be able to rescind the contract.

Answer 345

Duress is overcoming the will of a person and forcing the person into a contract by violence or a threat of violence, imprisonment of a threat of imprisonment, threat of physical injury to a family member or others, threat of wrongful destruction, injury, seizure, or withholding of one's property, or any other wrongful act that compels a persona against their will to enter into a contract. The contract may be voidable by the injured party. EXAMPLE:

Answer 346

Undue influence occurs when one person takes unfair advantage of another in a contractual relationship because of the parties' particular and peculiar relationship, or one party's weakness of mind, or due to a party's particular necessities or distress. A contract may be voidable if it was induced by reason of the fiduciary's undue influence over the other party. Note: EXAMPLE: Persons acting in a fiduciary capacity, such as attorney-client or physician-patient, may have an unfair advantage because the other party relies upon and gives undue weight to the fiduciary's counsel.

Answer 347

Not all contracts must be in writing to be enforceable; however, every state has adopted the common-law doctrine known as the statute of frauds, which requires that certain types of contracts be in writing to be enforceable in a court of law. Most notably, all contracts for the transfer of an interest in real estate must be in writing, with the only exception being leases of three years or fewer from the time of their making.

Answer 348

The parol evidence rule, another heritage of the common law, is a rule of evidence that dictates that no oral agreements that contradict the terms of a written contract may be considered in a lawsuit based on the written agreement. The written contract is assumed to be the complete manifestation of the agreement of the parties. The many exceptions to the rule include evidence that a contract was entered into illegally or evidence intended to clarify ambiguous contract terms. The party who drafted the ambiguous terms would most likely be ruled against in a court hearing.

Answer 349

This means that the contract must be performed within the time limit specified, and any party who has not performed on time is liable for breach of contract. If an offeror includes "time is of the essence" in the offer, the offeror can still revoke the offer at any time prior to acceptance. When a date is noted in a contract but is not followed by the phrase, "time is of the essence," the date is a general target date that all parties should attempt to meet.

Answer 350

refers to a transfer of rights or duties but not the liabilities under a contract to a third party. Rights in a contract may be assigned to a third party unless the agreement forbids such an assignment. Duties may also be assigned (delegated), but the original obligor remains secondarily liable for them (after the new obligor). The exception to this rule is a contract for personal services, which may not be assigned.

Answer 351

is another way to avoid the terms of an existing contract without breaching that contract. Nova means new, and novation is the substitution of a new contract for an existing agreement with the intent of extinguishing the old contract

Answer 352

This is sometimes referred to as accord and satisfaction. When one party accepts something less than agreed on as complete performance, the contract is considered discharged.

Answer 353

One party has substantially performed the contract but does not complete all the details exactly as the contract requires. Such performance—for example, under construction contracts—may be sufficient to force payment, with certain adjustments for any damages suffered by the other party.

Answer 354

An act required by the contract cannot be accomplished. This does not refer to a party's inability to do something; rather the impossibility of performing it.

Answer 355

A new contract changes the terms of the original contract.

Answer 356

This is in terms of voiding of a contract by a minor, as a result of fraud or the expiration of the statute of limitations, or as a result of the alteration of a contract without the written consent of all parties involved. Bankruptcy can also discharge a contractual obligation.

Answer 357

Thus, in many jurisdictions (but not North Carolina), the buyer can be sued for compensatory damages if the earnest money is not adequate to cover the seller's losses.

Answer 358

The injured party may be entitled to collect liquidated damages. Liquidated damages are defined as the amount of money that will compensate the injured party for breach, which the parties agree to at the time they enter into the contract. For example, in North Carolina, the earnest money deposit is considered liquidated damages in the event the buyer breaches the contract.

Answer 359

are special damages that might be obtained if the damages upon breach were reasonably foreseeable to the breaching party at the time of making the contract. It also allows the injured party to sue for lost profits.

Answer 360

The injured party may file a court action, known as a suit for specific performance, to force the other party to perform the contract as agreed. Specific performance is ordered only when the subject matter of the contract is not readily available from another source and when each party has the ability to perform the contractual obligations. Because every parcel of real estate is considered unique, a suit for specific performance brought by the buyer against the seller under a purchase and sales contract may be successful if the buyer can demonstrate that the property is unique and/or rare. Sellers are seldom successful with this remedy against the buyer; acceptance of liquidated damages is a more likely remedy against a buyer that has breached.

Answer 361

The injured party may rescind the contract, which means the contract is declared invalid and both parties return to the position they were in before they entered into the contract. Rescission may be appropriate when facts were misrepresented or one party entered the contract under duress. A right of rescission may be written into the contract or may be stipulated by law, such as the five-day right of rescission for a time-share purchase or the seven-day right of rescission for a new condominium purchase.

Answer 362

A broker is, however, permitted to fill in the blanks on certain approved preprinted documents (such as sales contracts and leases) when authorized to do so by the parties, provided the broker does not charge a separate fee for completing such forms. North Carolina Real Estate Commission Rule A.0112 requires that brokers include all required data when completing preprinted contracts but prohibits the inclusion of brokerage compensation or a liability disclaimer in a sales contract.

Answer 363

(called riders or addenda, or in the singular, addendum

Answer 364

The seller reserves the right to stop the bidding if it becomes apparent that the high bid will be unacceptable (i.e., too low) to the seller. The seller must reject all bids before the auction is concluded and the auctioneer accepts a bid.

Answer 365

The seller agrees to accept the high bid, no matter what the terms of that bid. This is also called an absolute auction in North Carolina.

Answer 366

an offer to purchase, a contract of purchase and sale, a purchase agreement, an earnest money agreement, buy-sell agreement, a deposit receipt, or another variation of these titles. In North Carolina the most common title is offer to purchase and contract.

Answer 367

NCBA/NCAR 2-T Offer to Purchase and Contract approved jointly by the North Carolina Bar Association and the North Carolina REALTORS®. The 2-T is primarily intended for sale of existing single-family residences, and brokers use standard addenda to tailor to needs of the parties. The 2-T is not for use with a lease-option agreement, lease-purchase agreement, or installment land contract.

Answer 368

one for the sale of vacant lot or land, one for new construction sales, and one for commercial sales transactions

Answer 369

Although ill-advised due to potential legal liability, a buyer's agent can be named as agent for an undisclosed principal if the buyer wishes to remain anonymous.

Answer 370

If the parties insist on suing each other for the earnest money, the party that loses the lawsuit will have to pay the attorney fees and legal costs of the winning party as well as the party's own expense of the suit.

Answer 371

If earnest money is paid by check, the check should be made payable to firm serving as escrow agent with a note on the check's memo line as to the purpose of the funds.

Answer 372

Earnest money must be deposited in a trust account held in an insured bank or savings and loan association legally conducting business in North Carolina within three banking days of contract formation. The funds can be deposited sooner if the escrow agent so chooses. The account can be interest-bearing according to the language in this paragraph

Answer 373

The only ways to resolve the disputed funds issues are parties agreeing in writing on how to disburse funds, court rules in lawsuit, or with written 90-day notice to the parties by the escrow agent, funds can be transferred to Clerk of Superior Court of the county in which the property is located.

Answer 374

In exchange for a negotiated due diligence fee paid directly to the seller, the buyer has the unlimited right to fully investigate the condition and allowed uses of the property to determine if the buyer wishes to consummate the purchase contract on the negotiated terms. No due diligence fee is required. The buyer has the unilateral right described to terminate the NCBA/NCAR 2-T OPC for any reason or no reason by delivering written notice of termination to the seller no later than 5:00 pm of the expiration date of the due diligence period, time being of the essence.

Answer 375

(1) a material breach by the seller as noted in Paragraph 8m or (2) material damage or destruction of the property improvements prior to closing.

Answer 376

The due diligence period is significantly different from the conventional option to purchase contract discussed later. Whereas a conventional option is the right to purchase by a certain date, the due diligence option is a right not to purchase by a certain date. It should be noted that this contract form does not have a loan or appraisal contingency. A contingency is a provision in a contract that requires a certain act to be done or a certain event to occur before the contract becomes binding; it is a condition of the contract. The buyers should explore their financing options and determine if they can obtain a loan during the due diligence period. If the buyer decides to terminate the contract during the due diligence period, a written notice of termination must be delivered to the seller prior to the expiration of the period. The buyer should heed the approved notice information that specifies what is considered an acceptable method of communication of notice. The mailbox rule does not apply for the delivery of termination of contract; the mailbox rule is only applicable to the creation of a contract. Although not required by the contract, a prudent real estate broker would obtain and retain proof of delivery of the notice.

Answer 377

Even though this paragraph states that any personal property will convey at no value, most lenders will not finance a contract with any entry in this paragraph

Answer 378

Although the settlement date is set in a different section of the NCBA/NCAR 2-T OPC, there are many things that conspire to delay the actual completion of settlement. The use of time is of the essence in regard to the settlement date is discouraged because it might have an unanticipated adverse effect on the parties. Consequently, the NCBA/NCAR 2-T OPC has limited the time parameters for a reasonable time after the stated Settlement Date to a 7-day grace period that the nondelaying party agrees to wait for the delaying party to close the transaction. On the 7th day after the stated contract settlement date, the nondelaying party has the unilateral right to terminate the contract and enforce any legal remedies for the breach of the contract by the delaying party.

Answer 379

A party seeking recovery of attorney's fees must first give written notice to the other party that they have five (5) days from the mailing of the notice to pay the outstanding amount(s) without the attorney's fees.

Answer 380

Probably one of the most-used addenda, this form addresses five separate contract concerns. One provision allows the offeror to implement an automatic expiration date and time for the attached NCBA/NCAR 2-T Offer to Purchase and Contract. Another provision allows the buyer to secure the seller's assistance in testing the property to determine if an adequate septic system can be installed or modified for the buyer's specific needs. If the property is currently subject to leases, the third provision requires all lease-related documentation to be given to the buyer for review during the due diligence period. The fourth provision would request repair or improvement projects that are known prior to contract formation. The fifth provision asks for the identifying information for any manufactured housing that will be included in the transaction.

Answer 381

counterparts

Answer 382

A real estate sale can be made under an installment land contract, sometimes called a land contract, land sales contract, or contract or agreement for deed. An installment land contract is not only a sales contract but also a financing instrument. The seller agrees to owner financing with some type of installment payment method for the buyer. Under an installment land contract, the seller, also known as the vendor, retains legal title, while the buyer, known as the vendee, secures possession of and an equitable interest in the property. The buyer holds equitable title, and the contract is a cloud on the seller's title. The buyer usually agrees to give the seller a down payment and pay regular monthly installments of principal and interest over a number of years. The buyer also agrees to pay real estate taxes, assessments, homeowner dues, insurance premiums, repairs, and upkeep on the property. While the buyer obtains possession when the contract is signed by both parties, the seller does not execute and deliver a deed to the buyer until the final payment has been made and all the terms of the contract have been satisfied.

Answer 383

There is an income tax benefit that comes from receiving the sales price in installments over several years instead of in a lump sum. The seller gets to retain legal title, which makes the seller feel more secure If the buyer defaults, many land contracts provide forfeiture as a remedy. Forfeiture means that all the monthly payments the buyer has made are forfeited as well as all rights in the property. the land contract may be the only way to make property desirable and/or attainable to buyers when interest rates are high or institutional loans are hard to obtain.

Answer 384

There is no standard approved form for an installment land contract, and it is never appropriate to use the Standard Form 2T for an installment land contract; therefore, all interested parties should consult an attorney for advice and drafting expertise. AND the buyer has three business days to cancel the contract following execution or receipt of the contract, whichever is later. The statute requires the seller to record the contract for deed or a memorandum of the contract within five business days of execution. The seller must allow the buyer at least 30 days to cure any default.

Answer 385

is a contract by which an optionor (generally an owner) gives an optionee (a prospective purchaser or lessee) the irrevocable right to buy or lease the owner's property at a fixed price within a stated period of time. An option to purchase has two considerations: (1) the option fee when the option is given and (2) the agreed-on sales price when the option is exercised.

Answer 386

A preemptive right gives a party the first right to purchase real property. The major difference between an option and a preemptive right is which party has the power to initiate the sale or lease: the buyer/tenant initiates an option, while the seller/landlord initiates an agreement for a preemptive right. There are several forms of preemptive rights, but the two most common versions are the right of first refusal and the right of first opportunity to purchase.

Answer 387

is created when a property owner promises to give the contracting party the first chance to buy the property or to match the bona fide offer of a third party, should the owner decide to sell sometime in the future. Rights of first refusal are commonly found in leases. In a lease situation, a right of first refusal might give the tenant the right either to purchase the property, if offered for sale, or to renew the lease or lease adjoining space. In some condominiums, the association of unit owners retains the right of first refusal on any sale of a unit. Note that with a right of first refusal, the property owner does not promise to sell the property at all—merely promises that should the decision be made to sell, the other party will get the first opportunity to buy. This is different from the option, where the owner promises to sell should the optionee choose to buy.

Answer 388

The right of first opportunity to purchase is a preemptive right agreement that endeavors to avoid some of the vague legalities of the right of first refusal. If the property owner decides to sell the property, the seller must offer to sell the property to the party with the right of first opportunity to purchase for a designated price. The holder of the right may opt to purchase for that price or decline the offer. If the offer is declined, the seller may now sell the property for a specified period of time to a third party for the designated price. The agreement may allow the owner to sell for a percentage of the designated price (e.g., 90% or higher of the designated price). If the owner does not sell to a third party during the specified time, the process begins anew with owner offering to sell the property to the right holder for a designated price.

Answer 389

leased fee estate plus reversionary right.

Answer 390

personal property because no ownership of the real property has changed hands.

Answer 391

Automatic termination after a definite period; no notice to terminate required unless written into the lease.

Answer 392

For a week-to-week tenancy, the notice period is two days. For a month-to-month tenancy, the notice period is seven days. For a year-to-year tenancy, the notice period is one month.

Answer 393

Tenant pays a fixed amount of rent but none of the property charges

Answer 394

Tenant pays a percentage of the gross or net income as rent

Answer 395

Tenant pays rent plus all or some of the property charges

Answer 396

Tenant pays rent, which increases at predetermined dates Sometimes called a step-up lease

Answer 397

Tenant typically pays rent on land and builds on it

Answer 398

When oil companies lease land to explore for oil, gas, and other minerals, a special lease agreement must be negotiated. Usually, the landowner receives a cash payment for executing the lease. If minerals are found, the property owner usually receives a portion of the value of the minerals as a royalty. The North Carolina statute of frauds states that any mineral lease, regardless of duration, must be in writing to be enforceable.

Answer 399

Full-service leases are commercial leases that are often used in large office or multitenant buildings such as shopping centers where the tenants share in overall operating expenses for the common areas and the building(s). Under a full-service lease, the landlord will provide most or all services related to the lease, such as utilities, cleaning services, grounds maintenance, et cetera. Usually rent is paid as a base amount plus a prorated share of the complex's operating expenses.

Answer 400

A commercial landlord will usually provide for the initial customization of leased space for a new tenant. The tenant is frequently allowed, within cost parameters, to specify customizing preferences, such as wall and floor covering selection, location of interior walls, and placement of doors. If the tenant wants improvements that exceed the upfit allowance, the tenant usually negotiates their inclusion in the rent or pays for the excess expense. Occasionally, in an effort to retain a desirable tenant, the landlord may offer upfitting improvements to renovate the tenant's current space.

Answer 401

The lessee may assign or sublease the lease if the lease terms do not prohibit it. Most leases prohibit the lessee from assigning or subletting without the lessor's written consent. The lessor, therefore, retains control over the occupancy of the leased premises but must not unreasonably withhold consent. With an assignment, a tenant transfers all leasehold interests, which include both the entire term of the lease and all premiums. In an assignment, the new tenant is the assignee who pays the rent directly to the landlord and the original tenant, who is the assignor, is held secondarily liable for the rent, unless they are able to obtain a release from the landlord. One who transfers less than all of the leasehold interests by leasing them to a new tenant subleases and retains a reversionary interest to re-enter the property prior to the end of the original lease period. In effect, a sublease is the making of a new lease, wherein the original lessee (tenant) becomes a sublessor and the new tenant becomes a sublessee. In most cases, the sublease or assignment of a lease does not relieve the original lessee of the obligation to make rental payments. When a lease is assigned, the original tenant retains secondary liability for paying the rent. When a lease is sublet, the original tenant retains primary liability for paying the rent. The sublessor's (original lessee's) interest in the real estate is known as a sandwich lease. The landlord may offer the original tenant a novation where the landlord signs a new lease with the new tenant thereby releasing the original tenant from further liability.

Answer 402

If the landlord fails to maintain the premises in habitable condition, the tenant is considered constructively evicted and may move out and stop paying future rent. Note that when the owner of leased property dies or the property is sold, the lease does not terminate. The heirs of a deceased landlord are bound by the terms of existing valid leases. In addition, if a landlord conveys leased real estate, the new landlord takes the property subject to the rights of the tenants.

Answer 403

In North Carolina, residential leases and the landlord-tenant relationship are governed by the Residential Rental Agreements Act (NCGS §42-38 et. seq.). The primary purpose of this Act is to ensure that only habitable residential units are rented. A failure to comply with the terms of this Act has potentially serious consequences. The Act does not apply to transient quarters such as hotels or motels, nor does it apply to commercial or rent-free properties.

Answer 404

The Act provides that the landlord's primary duty is implied warranty of habitability—to supply fit and habitable premises to the tenant. This means the premises must be fit for human occupancy. The Act (NCGS §42-42 and 42-43) sets forth standards for habitability and instructs the landlord to do whatever is necessary to put and keep the premises in a fit and habitable condition. The landlord must comply with current building and housing codes; make all necessary repairs to keep the premises in a habitable condition; keep all common areas safe; and maintain all electrical, plumbing, sanitary, heating, ventilating, and other facilities.

Answer 405

The common law of negligence holds that the landlord is liable for injuries that occur in common areas—hallways, stairways, elevators, sidewalks, and parking lots—when the landlord has negligently failed to maintain safe conditions in those areas. Therefore, if a tenant or guest has the right to be on the premises and is injured because of the landlord's failure to maintain the common areas, the injured party may be able to recover damages from the landlord. However, if the injury occurs in the area exclusively occupied by the tenant—such as an apartment or office space—the results are different. Generally, the landlord is not liable for injuries that occur within the leased premises. The only exception to this rule is if the landlord failed to keep the premises in a habitable condition. Under the North Carolina Residential Rental Agreements Act, the fact that the landlord failed to maintain the leased premises in a fit and habitable condition can be presented in court as evidence of the landlord's negligence. The negligence could mean that the landlord would be held liable for the injury. With the increase in crime, the landlord's liability for criminal acts that occur on leased premises or the common areas of rental property has become an issue. In North Carolina, a landlord is not generally liable for criminal acts committed against tenants unless the landlord knew or should have known of a dangerous situation and did nothing to protect the tenants. For instance, if a rental property is in a high crime area and the landlord knows that the security system is grossly inadequate, the landlord may be liable if a tenant is injured in a mugging in a building hallway.

Answer 406

The only possible legal eviction remedy is through the court system; in other words, a landlord cannot use self-help eviction remedies, no matter how peaceful. For example, the landlord cannot change the locks on the doors to prevent the tenant from entering the premises, cut off the tenant's utilities, or seize the tenant's possessions. Instead, the landlord must bring an eviction action in court before a magistrate in district court.

Answer 407

A state statute (NCGS §42-21.1) sets forth public policy against the self-help eviction procedure and replaces it with a procedure called summary ejectment. This hearing before a magistrate in small claims court is the only legal way a landlord can evict a tenant. The law (NCGS §42-25.7) also provides direction on the appropriate disposal of an evicted tenant's abandoned personal property. Note that the seizure of the personal property is prohibited. Expedited eviction is possible when the tenant, the tenant's family member, or guest has engaged in criminal activity in the leased unit; landlord should seek legal assistance before filing for expedited eviction.

Answer 408

Under the retaliatory eviction provision (NCGS §42-37), a tenant cannot be evicted because the tenant has asserted a legal right against the landlord. Therefore, a landlord cannot evict a tenant who, in good faith, requests that the landlord make required repairs, exercises legal rights against the landlord, becomes involved in a tenants' rights association, or complains to a government entity about a landlord's violation of landlord-tenant law. If the landlord tries to evict a tenant within 12 months after the tenant tried to assert a protected legal right, the tenant can use this doctrine as a defense in the eviction action. The doctrine does not require the landlord to renew the lease.

Answer 409

Tenants living in a foreclosed residential property were protected under the sweeping coverage of the federal Protecting Tenants at Foreclosure Act of 2009 (PTFA). This Act applies to any foreclosure on any federally related mortgage loan or any dwelling or residential real property. If the residential tenant had a bona fide lease that was in place prior to the foreclosure notice, the tenant could occupy the property for the remainder of the lease period, with one exception. If the new owner wished to occupy this property as a primary residence, the tenant is entitled to a 90-day notice to vacate the premises. If the tenant did not have a lease, a 90-day notice to vacate was to be given to the tenant. The protections given to tenants under the PTFA expired at the end of 2014. In 2015, the North Carolina General Assembly enacted a law that partially deals with such situations. Unlike the PTFA, however, the protections afforded to tenants under GS 45-21.33A only apply to tenants who occupy single-family residential property. Protections also exist for tenants regarding the notice of sale of foreclosed properties that contain fewer than 15 units.

Answer 410

While the previous federal law prohibits the new owner's immediate termination of a tenant's occupancy of a foreclosed residential dwelling, a North Carolina law (NCGS 42-25.2) allows a tenant to terminate a rental agreement early in some foreclosure situations. In North Carolina, a residential tenant must receive notice of an imminent foreclosure sale on the leased property under provisions of NCGS 42-21. If the leased unit is part of residential real property that contains less than 15 rental units and the tenant has received the required notice of foreclosure, the tenant has a statutory right to terminate the rental agreement subject to a 10-day notice to the landlord.

Answer 411

In North Carolina, the Tenant Security Deposit Act (NCGS §42-50 et. seq.) regulates the amount of money that can be required as a security deposit and what the landlord can do with that deposit. Any owner of residential rental property located in North Carolina must comply with this Act, even if not a licensed real estate broker. The amount of the security deposit depends on the term of the tenancy. The maximum amount of security deposit is the equivalent of... two weeks' rent if the tenancy is from week to week, one and one-half months' rent if the tenancy is from month to month, and two months' rent if the tenancy is longer than month to month. The landlord may do one of two things with the security deposit: (1) the security deposit can be placed in a trust account with an insured North Carolina bank or savings institution, or (2) the landlord can obtain a bond as a guarantee for the deposit. The landlord must tell the tenant either the name of the bank or savings institution or the name of the bonding company. (If a real estate agent is handling the deposit, the agent has only one option: the security deposit must be deposited into a trust account [see NCREC Rule A.0116].)

Answer 412

If the landlord's claim against the tenant security deposit cannot be determined within 30 days, tenant must be provided an interim accounting with a final accounting no later than 60 days from termination of tenancy and delivery of possession of the premises to the landlord or his agent.

Answer 413

If pets are allowed on the premises, the landlord is allowed to charge a separate, reasonable pet fee that can be nonrefundable. If the animal is a service animal, such as a Seeing Eye dog, it would not be regarded as a pet and a pet fee would not be allowed because a service animal is considered to be an extension of the handicapped person.

Answer 414

went into effect January 1, 2000, and is modeled after the Residential Rental Agreement Act. The purpose of the act is to establish uniform rules for landlords, tenants, and their agents involved in the handling of short-term rentals under 90 days in length where the tenant has a primary residence elsewhere.

Answer 415

Real estate law in North Carolina does not define what may constitute ordinary wear and tear versus what may constitute actual damages to the premises.

Answer 416

all rental agreements to be in writing; the landlord to collect payments in advance of the tenancy, but monies must be placed in an escrow account in a federally-insured depository or trust institution authorized to do business in North Carolina (no later than three banking days after receipt of these payments); the landlord to refund tenant's payments if fit and habitable premises cannot be provided or substitute a reasonable comparable property in such condition; regulations for the use of monies collected as security deposits; the new owner to take title subject to rentals for the next 180 days, if the property is sold; an expedited eviction procedure; the landlord to provide tenants with fit premises and keep property repaired and safe; the tenants to maintain the property and not damage the premises; upon compliance, the tenants to be given a refund of their rent if tenants are ordered by authorities to evacuate, unless the tenants had been offered evacuation insurance to cover the potential risk; and any automatic forfeiture of tenant security deposit due to a breach by the tenant is prohibited.

Answer 417

Prior to entering into a contract to sell, the seller-owner must disclose to the prospective buyer all time periods during which the property is subject to a vacation lease agreement. Within ten (10) days after the transfer, the grantor (seller) must disclose to the grantee (buyer) the name and address of each tenant and provide the grantee with a copy of each lease agreement. The buyer must honor all existing lease agreements that will end within 180 days after the transfer, defined as the recording of the deed to the buyer. Tenants under signed lease agreements ending more than 180 days after the property transfer may not enforce the lease against the new owner, but they are entitled to a refund of all advance rent and fees paid, subject to permissible deductions, i.e., administrative fee and fees to third parties for goods/services procured for the tenant.

Answer 418

Onsite leasing agents who show available units and collect rent payments are frequently unlicensed employees of the property manager. G.S. 93A-2(c)(6), quoted below, grants licensing exemptions if the employee does not negotiate any lease terms. Any salaried person employed by a licensed real estate broker, for and on behalf of the owner of any real estate or the improvements thereon, which the licensed broker has contracted to manage for the owner, if the salaried employee is limited in his employment to: exhibiting units on the real estate to prospective tenants; providing the prospective tenants with information about the lease of the units; accepting applications for lease of the units; completing and executing preprinted form leases; and accepting security deposits and rental payments for the units only when the deposits and rental payments are made payable to the owner or the broker employed by the owner. The salaried employee shall not negotiate the amount of security deposits or rental payments and shall not negotiate leases or any rental agreements on behalf of the owner or broker.

Answer 419

Although licensed property management firms manage some communities, there is currently no real estate license requirement in North Carolina to provide association management. Of course, if brokers are involved in association management, they will be held to a higher level of conduct than an unlicensed manager and subject to license law.

Answer 420

In the simplest terms, a property manager is someone who preserves the value of an investment property while generating income as an agent for the owner. The agency relationship is created by the property management contract. The fiduciary relationship that exists between the property manager and the property owner is based on the same relationship of trust that exists between a real estate broker and a seller or buyer. A property manager usually serves the property owner as a general agent.

Answer 421

The property manager is expected to market the property and control operating expenses in order to maximize income. With this expectation in mind, the property manager chooses the best possible means to carry out an agent's responsibilities and has more authority and discretion than an employee. The manager should maintain and modernize the property to preserve and enhance the owner's capital investment. The manager carries out these objectives by securing suitable tenants, collecting the rents, caring for the premises, budgeting and controlling expenses, hiring and supervising employees, keeping proper accounts, and making periodic reports to the owner. Property managers do not perform functions such as making capital improvements, reinvesting profits, paying the owner's income tax, or establishing a depreciation schedule.

Answer 422

Description of the property. Contract period. This period should have definite beginning and ending dates but can allow for automatic term renewal if parties have the opportunity to terminate the agreement at the end of any term period. Management fee. The fee can be based on a percentage of gross income or net operating income, a commission on new rentals, a fixed fee, or a combination of these. For example, the manager may get 3% of all monthly rentals collected. Both the owner and manager must ensure that the agreement is very specific as to how the management fee will be determined. If the manager will collect additional fees, such as application fees or late payment fees, the ownership of those monies must be clarified in the agreement. Definition of management's responsibilities. All of the manager's duties should be stated in the contract; exceptions should be noted. Important inclusions are to whom the rent and security deposit are paid; the method used in returning security deposits; and the method of paying mortgages, utility costs, and other bills. Adherence to all fair housing laws required. Extent of the manager's authority as an agent. This provision should state what authority the manager is to have in such matters as hiring, firing, and supervising employees; establishing rental rates; making expenditures; and authorizing repairs within the limits set previously with the owner. (Repairs that exceed a certain expense limit may require the owner's written approval.) Authorization for marketing and/or cooperating with or compensating other brokers also would be necessary. Making capital improvements would be the owner's responsibility. Reporting. Agreement should be reached on the frequency and detail of the manager's periodic reports on operations and financial position. These reports enable the owner to monitor the manager's work and serve as a basis for both the owner and the manager to assess trends that can be used in shaping future management policy. Responsibilities of owner. This provision should clarify the duties that the property owner retains including proper insurance coverage, adherence to fair housing laws, adequate provision of funds for management and maintenance of the property. Allocation of the property management expenses, such as fees for custodial help, advertising, supplies, and repairs, should state which are to be charged to the property's expenses versus which are to be paid by the owner. Duties upon termination. Both parties agree to act promptly to settle financial and recordkeeping accounts, some of which might include the transfer of funds and notifications of tenants. Miscellaneous provisions. Additional provisions should address tenant security deposits and trust-account management; entry of the leased unit by owner or agent during the lease period; and Lead-Based Paint Hazard Reduction Act disclosure compliance. Agent should receive notification of sale of property and owner should receive notification if the agent assigns or sells ownership right in the property management firm. Owner needs to acknowledge that the manager is a real estate professional, but other service experts might be indicated.

Answer 423

(1) the owner's objectives, (2) the regional and neighborhood market analysis, and (3) the specific property analysis. A regional market analysis should include the general economic trend, population trends, employment data, and transportation resources. The neighborhood market analysis should explore many of the same things on a more localized level that include neighborhood amenities and resources. Occupancy, absorption rates, and new starts are critical indicators. The property analysis should evaluate the number and size of the rental units, the physical condition of the property, the occupancy and rental history, plus what makes the property desirable to prospective tenants. The plan also includes a budgetary section on sources of revenue and anticipated expenses. While the management plan is a document for the present, it is forward-looking in determining the feasibility of a property owner's long-term goals for a specific property.

Answer 424

An operating budget is the projection of income and expense for the operation of a property over a one-year period. This budget, developed before attempting to rent property, is based on anticipated revenues and expenses and provides the owner the amount of anticipated profit. The property uses the operating budget as a guide for the property's financial performance in the present and future.

Answer 425

If an owner and a property manager decide that modernization or renovation would enhance the property's value, the manager should budget money to cover the costs of remodeling. The property manager should be thoroughly familiar with the principle of contribution or should seek expert advice when estimating any increase in value expected by an improvement. In the case of large-scale construction, the expenses charged against the property's income should be spread over several years. The property owner decides to make capital improvements based on projections and advice from the property manager.

Answer 426

A cash flow report is a monthly statement that details the financial status of the property. Sources of income and expenses are noted, as well as net operating income and net cash flow. The cash flow report is the most important financial report because it provides a picture of the current financial status of a property.

Answer 427

Potential gross income includes potential gross rentals if 100% occupied and collected, delinquent rental payments, utilities, vending, contracts, late fees, and storage charges. Any losses from vacancy and collection losses or bad debt expenses (e.g., fees for bad checks) are deducted from the total potential gross income to arrive at the effective gross income.

Answer 428

Potential gross rental income + Other income − Losses incurred = Effective gross income Effective gross income − Operating expenses = Net operating income before debt service (e.g., mortgage payments) Net operating income before debt service − Debt service − Capital expenditures − Reserves = Cash flow

Answer 429

A profit and loss statement is a financial picture of the revenues and expenses used to determine whether the business has made money or suffered a loss. It may be prepared monthly, quarterly, semiannually, or annually. The statement is created from the monthly cash flow reports and does not include itemized information. A formula for profit and loss statement looks like this: Gross receipts − Operating expenses − Total mortgage payment + Mortgage loan principal = Net profit

Answer 430

The budget comparison statement compares the actual results with the original budget, often giving either percentages or a numerical variance of actual versus projected income and expenses. Budget comparisons are especially helpful in identifying trends in order to help with future budget planning.

Answer 431

cash throw off

Answer 432

Leverage is the use of borrowed money to finance an investment. An investor often stands to make more money by investing with borrowed money, usually obtained through a mortgage loan or deed of trust loan. Low mortgage payments spread over a long period result in a higher cash flow because they allow the investor to retain more income. In turn, high mortgage payments contribute to a lower cash flow. As a rule, an investor can receive a maximum return from the initial investment by making a small down payment, paying a low interest rate, and spreading mortgage payments over as long a period as possible. The effect of leveraging is to provide a return that reflects the result of market forces on the entire original purchase price but that is measured only against the actual cash invested.

Answer 433

In establishing a rental schedule for a property, a manager must be concerned that, in the long term, the income from the rentable space will cover the property's fixed charges and operating expenses, plus provide a fair return on the investment. Consideration must be given to the prevailing rates in comparable buildings and the current level of vacancy in the property to be rented—supply and demand. Once the manager makes a detailed survey of the competitive space available in the neighborhood, rental prices should be adjusted for differences between these neighboring properties and the subject property. Annual rent adjustments are usually warranted. Note that although residential apartment rental rates are stated in monthly amounts per unit, office and commercial space rentals may be stated according to the annual or the monthly rate per square foot of space. In establishing rental rates, the property manager has four long-term considerations: The rental income must be sufficient to cover the property's fixed charges, such as taxes and insurance, and operating expenses, such as maintenance. (Note that debt service [principal and interest payment] on a mortgage loan is not an operating expense.) The rental income must provide a fair return on the owner's investment. The rental rate should be in line with prevailing rates in comparable properties. It may be slightly higher or slightly lower, depending on the strength of the property. The current vacancy rate in the property is a good indicator of how large a rent increase is advisable. A building with a low vacancy rate (that is, few vacant units) is a better candidate for an increase than one with a high vacancy rate. ps... any time the occupancy level exceeds 95%, an analysis should be made to be certain that the building rates are not below market.

Answer 434

(1) preventive maintenance, (2) repair or corrective maintenance, (3) routine maintenance and cleaning, and (4) construction.

Answer 435

the actual repairs that keep the building's equipment, utilities, and amenities functioning as contracted for by the tenants. Repairing a boiler, fixing a leaky faucet, and mending a broken air-conditioning unit are acts of repair maintenance. The property manager must also supervise routine maintenance and cleaning throughout the building, including such day-to-day duties as cleaning common areas; performing minor carpentry and plumbing tasks; and providing regularly scheduled upkeep of heating, air-conditioning, and landscaping. Deferred maintenance can cause a rental property to diminish in value. When property managers and owners postpone taking care of their properties by failing to take care of routine matters, such as landscape upkeep or checking on air conditioning systems, or by ignoring necessary repairs, prospective tenants will notice such neglect and choose other possible rentals. Moreover, deferred maintenance can lead to harm to tenants or their personal property. Finally, property maintenance requires new or renovative construction. Especially when handling commercial or industrial space, the property manager often is called on to make tenant improvements—alterations to the interior of the building to meet the functional demands of the tenants. These alterations may range from repainting to completely gutting the interior and redefining the space. Tenant improvements are especially important when renting new buildings because the interior is usually left as an unfinished shell so that it can be customized for individual tenants. Supervision of modernization or renovation of buildings that have become functionally obsolete and unsuited to today's building needs is also important. The renovation of a building often increases the building's marketability and therefore its income potential.

Answer 436

Any employer with 15 or more employees must adopt nondiscriminatory employment procedures.

Answer 437

avoid it by removing the source of risk, such as a swimming pool; retain it to a certain extent by insuring it with a large deductible (loss not covered by the insurer); control it by installing sprinklers, fire doors, and other preventive measures; or transfer it by taking out an insurance policy.

Answer 438

Bonding provides a form of honesty insurance so that any money lost or embezzled by an employee will be reimbursed by the insurance company.

Answer 439

Fire insurance policies provide coverage against direct loss or damage to property from a fire on the premises. Standard fire coverage can be extended to cover hazards such as windstorm, hail, smoke damage, or civil insurrection (like a typical homeowners policy).

Answer 440

Consequential loss insurance, which can include rent loss, covers the loss of revenue to a business if the business's property cannot be used.

Answer 441

This type of insurance covers building contents and personal property during periods when neither is actually located on the business premises, such as stolen from the company van while traveling.

Answer 442

Public liability insurance covers the risks an owner assumes when the public enters the building. Payments under this coverage are used to settle claims for medical expenses for a person injured in the building as a result of the owner's negligence. Another liability risk is that of medical or hospital payments for injuries sustained by building employees in the course of their employment. These claims are covered by state laws known as workers' compensation acts. These laws require that a building owner who is an employer obtain a workers' compensation policy from a private insurance company.

Answer 443

Casualty insurance policies include coverage against theft, burglary, vandalism, and machinery damage as well as health and accident insurance. Casualty policies are usually written on specific risks, such as theft, rather than being all-inclusive.

Answer 444

Surety bonds cover an owner against financial losses resulting from an employee's criminal acts or negligence while performing assigned duties.

Answer 445

the depreciated actual value or cash value of the damaged property or the current replacement cost.

Answer 446

that the insured carry fire coverage, usually in an amount equal to 80% of the building's replacement value.

Answer 447

As with real estate sales commission rates, all management fees must be negotiable between the parties. It is a violation of federal antitrust laws for property managers to conspire to set standard rates for their local areas.

Answer 448

A property manager for corporate-owned properties is usually an unlicensed employee of the corporation.

Answer 449

An owner's title insurance policy is a contract which compensates an owner against losses sustained because of undiscovered title defects that existed at the time the policy was issued. A lender's title insurance policy insures the lender up to the outstanding loan amount. In North Carolina, owner's title insurance which covers the owner's equity in the property is optional, but the majority of purchasers buy a policy for themselves as well as for their lenders.

Answer 450

A mortgage insurance policy is a product that protects lenders against the possibility of financial losses sustained in a foreclosure. These policies are usually required when a buyer's down payment is less than 20%. This type of policy should not be confused with a mortgage term life insurance policy. A mortgage term life policy protects the owner's estate by providing funds that can be used to help with mortgage payments in the event of the borrower's job loss, disability, or death.

Answer 451

casualty insurance

Answer 452

homeowners' insurance

Answer 453

government agencies.

Answer 454

coinsurance clause

Answer 455

property insurance or casualty insurance

Answer 456

liability insurance

Answer 457

package insurance

Answer 458

packaged homeowners' insurance policy (also called hazard insurance) These policies insure holders against the destruction of their property by named perils, injury to others that occurs on the property, and theft from the premises of any personal property that is owned by the insured or members of the insured's immediate family.

Answer 459

The basis for most homeowners' policies is called a basic form (HO-1), and it usually provides property coverage against damage caused by: fire and lightning glass breakage, windstorm and hail, explosion, riot and civil commotion, damage by aircraft, damage from vehicles, damage from smoke, vandalism and malicious mischief, theft, and loss of property removed from the premises when it is endangered by fire or other perils. The packaged homeowners' policy also includes liability coverage for (1) personal injuries to others resulting from the insured's acts of negligence, (2) voluntary medical payments and funeral expenses for accidents sustained by guests or resident employees on the insured's property, and (3) physical damage to the property of others caused by the insured. Voluntary medical payments cover injuries to a resident employee but do not cover benefits due under any workers' compensation or occupational disease law.

Answer 460

This Homeowners' Broad Form insurance policy is a named peril policy, which means that if a specific peril or hazard is not named in the policy, it is not covered. HO-2 covers more perils than the basic form (including falling objects; weight of ice, snow, or sleet; collapse of buildings; malfunctioning heating systems; accidental discharge of water or steam; and electrical currents).

Answer 461

This Homeowners' Special Form is an all-risk form insurance policy that provides even greater coverage than HO-2 because loss and damage to real property caused by all perils is covered unless excluded from coverage. HO-3 remains a named peril policy regarding damage or loss to personal property. Because it provides the insured with a greater amount of protection, it is the most commonly used residential policy today. It also meets the minimum coverage required by most mortgage lenders.

Answer 462

This Homeowners' Contents Broad Form is a tenant's policy (renter's policy) that covers the same perils as HO-2 regarding the insured's personal property. It cannot insure the building in which the tenant lives because the tenant does not hold the required financial interest in the property. HO-4 will frequently include liability insurance for any damage that the tenant might cause to the rented property.

Answer 463

This homeowners' policy insures an owner-occupied dwelling, other structures in connection with the dwelling, unscheduled personal property on and away from the premises, and loss of use. This policy also provides personal liability coverage and medical payments coverage. This is the broadest homeowners' form, as coverage is on an all-risks basis for the dwelling and other structures, as well as personal property.

Answer 464

This Homeowners' Unit-Owners Form policy is designed for the special needs of condominium owners. Because condo ownership is limited to air space, (ownership extends inward from interior walls, floors and ceilings), the main areas of real property concern are coverage of personal property and fixtures as well as liability from injuries.

Answer 465

An extended all-risk form providing broad coverage of both real and personal property. The HO-7 is designed for and primarily sold to owners of very expensive property.

Answer 466

This Homeowners' Modified Coverage Form is generally used when properties have less market value than the cost to replace them. It may be used to insure older homes.

Answer 467

As with all enforceable bilateral contracts, both parties promise some action in exchange for the other party's promised action. The insurer promises to financially reimburse the insured in the event of a covered loss while the insured promises to make timely payment of premiums.

Answer 468

This section clearly states the terms of the insurance policy. The actual dates of coverage are specified; and the insurance rating is determined by the property description. The basic details of the real and personal property coverage include the limits of liability coverage and any "deductibles" that the insured might have to personally pay before coverage can be applied. Any endorsements, or perils that have been added to the general policy, will be noted here. The declaration page will also contain the name of any mortgagee, signature of an authorized agent, and other administrative matters.

Answer 469

All the details of coverage are contained in the various policy provisions. If it is a named peril policy, those perils that are covered will be clearly stated; whereas, if it is an all-risk policy, all the exclusions (what will not be covered by the insured) will be clarified. Any conditions or added endorsements to the policy will be specified.

Answer 470

A condition is a limitation on the coverage of a specific insured property. For example, damage to a vehicle will only be covered if the vehicle was inside the garage at the time of the damage.

Answer 471

An endorsement is coverage for specific property or perils that are not covered in the original policy and is sometimes called a rider. For example, if the homeowner owns a collection of rare books, an endorsement would probably be needed to fully insure the collection against loss.

Answer 472

An exclusion is some item, or loss due to a specific event, that is not covered by the policy. For example, most policies exclude the coverage of loss due to acts of war or terrorism.

Answer 473

Homeowners' insurance companies report all claims for which they pay out money, set up a file for a possible claim, or formally deny a claim. These reports are gathered by LexisNexis®, a consumer-reporting agency (www.consumerdisclosure.com), who then generates a CLUE (Comprehensive Loss Underwriting Exchange) report. The report generally contains up to seven years of personal-auto and personal-property claims history. The report contains the following claim information provided by your insurance company: your name, date of birth, policy number, date of loss, type of loss, amount the company paid, description of the covered property, and property address for homeowner claims, or specific vehicle information for auto claims.

Answer 474

In the past, buyers used to wait as late as the day of settlement to contact their insurance companies regarding these matters, but today it is wise for them to obtain this information shortly after going under contract.

Answer 475

Insurance policies usually contain exclusions for vacant property. Vacant properties have a greater chance of vandalism, undiscovered damage, and theft, and can adversely affect property insurance claims. A vacant property is one that is completely empty, that is, the property lacks inhabitants and personal property. Vacancy can also be defined as "substantially empty of personal property necessary to sustain normal occupancy." A vacant property is not the same as an unoccupied one. The term unoccupied means that the property has been left in a state where the property still contains all items and possessions as if the owners were to return at any time. For a home to be determined as unoccupied, there must be sufficient items left in the house such as cooking utensils, functioning appliances like a microwave oven, toaster, refrigerator, and basic furniture. If a property is indeed unoccupied, such as the case in a vacation home or a main residence where the owner is away for an extended period of time, normal coverage usually remains in place. In a homeowners policy, vacancy exclusions will remove coverage for vandalism, building glass breakage, water damage, theft or attempted theft if the damage occurs within 30 or 60 days (depending on the policy and state laws) of the home becoming vacant. Coverage for standard perils such as fire and wind usually remain intact.

Answer 476

31 percent Standard commercial property policies generally remove coverage for vandalism, sprinkler leakage, water damage, theft, or attempted theft when a building is vacant for more than 60 days.

Answer 477

15 percent That means, if $20,000 of damage occurs, the policy would pay only $17,000 (less the insurance policy's deductible).

Answer 478

30 to 60 consecutive days

Answer 479

recordation of the deed

Answer 480

Most policies contain provisions that state that "if the insured building is vacant or unoccupied for more than a certain length of time, the owner may not be able to recover any losses that may occur." According to North Carolina statute, insurance companies may use 60 consecutive days as the unoccupied/vacancy time period. A property owner should also make sure the building is not vacant for a longer period than that stated in the insurance policy (e.g., 60 days).

Answer 481

Seller possession after closing or buyer possession before closing are two very risky situations for the parties as well as for the brokers involved. Imagine a seller remaining in possession after closing and causing a fire in the property. Consider the consequences if a buyer moves in before closing and causes damage to the property.

Answer 482

landlord insurance; renters insurance

Answer 483

FEMA (www.fema.gov)

Answer 484

flood hazard areas

Answer 485

aims to reduce the impact of flooding on private and public structures. It does so by providing affordable insurance to property owners, renters, and businesses, and by encouraging communities to adopt and enforce floodplain management regulations. These efforts help mitigate the effects of flooding on new and improved structures. Overall, the program reduces the socio-economic impact of disasters by promoting the purchase and retention of general risk insurance, but also of flood insurance, specifically.

Answer 486

Year of building construction Building occupancy Number of floors Location of its contents Flood risk (e.g., flood zone classification) Location of the lowest floor of the building in relation to the base flood elevation (computed elevation to which flood water is anticipated to rise during a flood) on the flood map Deductible and amount of building and contents coverage

Answer 487

Flood zones are geographic areas that FEMA has defined according to varying levels of flood risk. These zones are depicted on a community's Flood Insurance Rate Map or Flood Hazard Boundary Map. Each zone reflects the severity or type of flooding possible in the area.

Answer 488

flood elevation certificate; flood insurance

Answer 489

Special Flood Hazard Areas or SFHAs

Answer 490

The maximum amount of NFIP coverage available for the particular property type, the outstanding principal balance of the loan, or the insurable value of the structure.

Answer 491

Lenders may waive the flood insurance requirement if they are provided documentation from FEMA that says the property is outside the 100-year flood plain. The area of the 100-year (or 1% annual chance) flood plain is called the Special Flood Hazard Area or SFHA. If the property is not in a high-risk area, but instead in a moderate-to-low-risk area, federal law does not require flood insurance; however, a lender can still require it. In fact, nearly 25% of NFIP flood claims occur in these moderate- to low-risk areas. Note that if during the life of the FEMA loan the maps are revised, and the property is now in the high-risk area, lenders will notify borrowers that they must purchase flood insurance. (Note that the term "100-year flood" is misleading. It is not the flood that will occur once every 100 years. Rather, it is a flood level that has a 1% chance of being equaled or exceeded each year. Thus, a 100-year flood could occur more than once in a relatively short period of time or even within the same month. Because this term is misleading, FEMA has also defined it as the "1-percent-annual-chance flood." That term is now used by most federal and state agencies.)

Answer 492

Under the lien theory, which is the older, more traditional approach, a two-party mortgage instrument is used as security for the debt. The borrower (mortgagor) retains both legal and equitable title to the property. The lender (mortgagee) is given the right to have the property sold through the judicial foreclosure process and the proceeds applied to the debt, should the borrower default under the terms of the mortgage loan. Title theory uses the three-party deed of trust instrument (a form of mortgage) as security for the debt. The borrower (grantor or trustor) actually conveys legal title to the trustee (third party) to hold for the lender (beneficiary) until the debt is satisfied. The borrower retains equitable title to the property. This means that the borrower has the right to use and possess the property as if he or she owned it and to demand the return of the legal title when the debt is repaid. Upon request of the lender, the trustee can initiate the power of sale foreclosure to sell the property if the debt is not paid per the terms of the promissory note. The lender's legal ownership is subject to termination on full payment of the debt or performance of the obligation.

Answer 493

The legal differences between title theory and lien theory are of little significance today. Under both theories, if a borrower defaults, the lender may foreclose the lien, offer the property for sale, and apply the funds received from the sale to reduce or extinguish the borrower's obligation. As protection to the borrower, most states allow a statutory redemption period during which the borrower in default can redeem the property.

Answer 494

The promissory note, or financing instrument, is the written promise or agreement to repay a debt in definite installments with interest. The mortgagor executes one or more promissory notes to reflect the amount of the debt. In some states, a bond is used as evidence of a debt secured by a mortgage.

Answer 495

The mortgage or deed of trust, that is, the security instrument, is the document that pledges the property to the lender as security or collateral for a debt.

Answer 496

Hypothecation is the act of pledging real property as security for payment of a loan without giving up possession of the property. A pledge of security—a mortgage—cannot be effective legally unless there is a debt to secure. Both the note and the mortgage must be executed (signed) to create an enforceable mortgage loan.

Answer 497

In some areas of the country, including North Carolina, lenders prefer to use a three-party security instrument known as a deed of trust, or trust deed (see Deed of Trust), rather than a mortgage document. In a deed of trust, the borrower conveys naked title or bare legal title (title without the right of possession) to the real estate as security for the loan from the borrower to a third party, called the trustee. The trustee then holds title on behalf of the lender, known as the beneficiary, who is the legal owner and holder of the promissory note. The wording of the conveyance sets forth actions that the trustee may take if the borrower, known as the grantor/trustor, defaults under any of the deeds of trust terms. The procedure for foreclosing a deed of trust is simpler and faster than the procedure used to foreclose a mortgage, because the deed of trust contains an automatic power-of-sale clause that, in case of the borrower's default, gives the trustee the power to sell the property in a nonjudicial foreclosure. Note that the term mortgage loan is commonly used to refer to a loan secured by either a mortgage or deed of trust.

Answer 498

The mortgage or deed of trust must refer to the terms of the promissory note and clearly establish through the use of a mortgaging clause that the property is intended to be security for a valid debt. It must identify the lender and the borrower (who must have the capacity to contract) and must include an accurate, adequate legal description of the property. It must be in writing and signed by all parties who have an interest in the real estate. If a property will be owned by a married couple as tenants by the entirety or as joint tenants, both spouses will be required to sign the mortgage or deed of trust even if only one spouse signed the mortgage note. (The lender does not sign the mortgage or deed of trust.) Finally, the mortgage or deed of trust must be recorded and delivered to and accepted by the lender or trustee.

Answer 499

payment of the debt in accordance with the terms of the note; payment of all real estate taxes on the property given as security; maintenance of adequate insurance to protect the lender if the property is destroyed or damaged by fire, windstorm, or another hazard; maintenance of the property in good repair at all times to not allow waste; and lender authorization before making any major alterations or demolishing any building on the mortgaged property.

Answer 500

Failure to meet any of these obligations can result in a borrower's default on the note. When this happens, the acceleration clause allows the lender to call the note and mortgage or deed of trust due and payable. The loan documents may provide for a grace period (e.g., 30 days) for the borrower to correct the default, after which the lender has the right to foreclose the mortgage or deed of trust and collect on the note. The most frequent cause of default is the borrower's failure to meet monthly payment installments.

Answer 501

The borrower has the right to possess and enjoy the property during the loan term, with no interference from the lender. The borrower also has the right (right of defeasance) to have legal title to the property transferred back to him or her when the loan is paid in full.

Answer 502

satisfaction of mortgage, also known as a deed of release, reconveyance deed, release of mortgage, or mortgage discharge

Answer 503

As mentioned earlier, because a note is a negotiable instrument, it may be sold to a third party without the consent of the borrower. The lender endorses the note to the third party and also executes an assignment of mortgage. The assignee becomes the new owner of the debt and security instrument with all the rights and obligations of the original lender. This assignment must be recorded. On payment in full, or satisfaction of the debt, the assignee is required to execute the satisfaction, or release, of the security instrument (discussed earlier). In the event of a foreclosure, the assignee is required to file the suit. The note and mortgage cannot be assigned if the loan is in default.

Answer 504

the process of selling the mortgaged real estate to repay the debt from the proceeds of the sale. The foreclosure procedure brings the rights of the parties and all junior lienholders to a conclusion and passes title in the subject property to the highest acceptable bidder at a foreclosure sale. Property thus sold is free of the mortgage and all junior liens, but it still may have other encumbrances. Note that the purpose of foreclosure is to cut off the borrower's equity of redemption rights.

Answer 505

Mortgages are foreclosed through a court process called judicial foreclosure. A judicial foreclosure proceeding provides that the property pledged as security may be sold by court order after the mortgagee has given sufficient public notice. On a borrower's default, the lender may accelerate the due date of all remaining monthly payments. The lender's lawyer can then file a suit to foreclose the lien. On presentation of the facts in court, the property is ordered sold. A public sale is advertised and held, and the real estate is sold to the highest acceptable bidder. The new owner receives title to the property by means of a sheriff's deed.

Answer 506

A deed of trust does not have to be foreclosed through a court action, so this type of foreclosure is called a nonjudicial foreclosure or power of sale foreclosure. Nonjudicial foreclosure is made possible by the power-of-sale clause in the deed of trust. The power-of-sale clause gives the trustee the power to sell the property and use the proceeds to repay the debt. (Note that a mini-hearing is required before the clerk of the court; otherwise, the property cannot be sold.) To institute a nonjudicial foreclosure, the trustee or lender must record a notice of default at the county courthouse in the Clerk of Court's office within a designated time period to give notice to the public of the intended auction. Generally, this official notice is accompanied by advertisements published in local newspapers that state the total amount due and the date of the public sale. The trustee then conducts the sale and transfers title to the high bidder by means of a trustee's deed. North Carolina deeds of trust allow for the power of sale foreclosure.

Answer 507

Although the judicial and nonjudicial foreclosure procedures are the prevalent practices today, in a few states it is still possible for a lender to acquire the mortgaged property by a strict foreclosure process. After appropriate notice has been given to the delinquent borrower and the proper papers have been prepared and filed, the court establishes a specific time period during which the balance of the defaulted debt must be paid in full. If this is not done, the court usually awards full legal title to the lender. Strict foreclosure is not used in North Carolina.

Answer 508

After the property is sold at the foreclosure sale, the proceeds are distributed in the following five-step order: To pay all costs of the sale, including court costs or trustee fees, legal fees, advertising fees, et cetera To pay any outstanding real and personal property taxes or assessments To pay the mortgage(s) or deed(s) of trust debt (assuming this debt has first priority over any other liens) in order of recordation To pay off any other liens in order of priority To pay any surplus (equity) to the borrower

Answer 509

equity right of redemption or statutory right of redemption

Answer 510

equity of redemption (also called the equity right of redemption) Certain states also allow defaulted borrowers a period in which to redeem their real estate after the sale. During this period (which may be as long as one year), the borrower has a statutory right of redemption.

Answer 511

During the North Carolina 10-day statutory redemption period after the auction (the upset bid period), a North Carolina mortgagor (borrower) can try to raise the necessary funds to redeem the property. During the upset bid period, any qualified bidder can submit an upset bid, a bid to purchase the property for an amount that exceeds the foreclosure sale price by a specific margin. Each upset bid triggers a new 10-day period. If the defaulted borrower can pay all that is owed to the lender (including accrued interest and penalties plus cost of foreclosure sale) any time prior to confirmation of sale, the borrower redeems the property, receives legal title, and eliminates the previous winning bid. The foreclosure sale becomes final at the end of any 10-day period when no new bid is filed and the borrower's right to redeem the property is terminated.

Answer 512

personal judgment; deficiency judgment If any surplus proceeds exist from the foreclosure sale after real estate taxes, the mortgage debt and all junior liens (second mortgage, mechanics' liens, et cetera) are paid off and expenses and interest are deducted. These proceeds (equity) are paid to the borrower. In North Carolina, deficiency judgments are prohibited in certain cases, such as when a purchase money deed of trust (seller financing) is used. If the seller is holding a purchase money mortgage/deed of trust, the seller has a special priority in lien payoffs in the foreclosure.

Answer 513

deed in lieu of foreclosure; friendly foreclosure

Answer 514

A short sale is a transaction where the proceeds from the sale are not sufficient to fully satisfy the outstanding balance on the seller's existing mortgage(s), and the borrower lacks sufficient funds to make up the shortfall. A short sale is similar to a deed in lieu of foreclosure and occurs when a lender agrees to discount the remaining loan balance in the following manner: subject to the lender's approval, the borrower sells the mortgaged property for less than the outstanding balance of the loan and cedes all of the proceeds to the lender in full satisfaction of any mortgage debt. If the lienholder does not authorize the short sale, the seller cannot convey marketable title to a purchaser unless the seller can bring funds from another source to cover the shortfall.

Answer 515

deficiency

Answer 516

When a real estate purchase is financed with a mortgage loan, the borrower must sign a promissory note. The promissory, or mortgage, note is legal evidence of the debt between the borrower and lender.

Answer 517

(1) term, (2) promise to pay, and (3) signature of the borrower(s) The borrower is called the maker, or payor, or obligor, and the lender is called the payee

Answer 518

negotiable

Answer 519

nonnegotiable

Answer 520

Virtually all promissory notes used by institutional lenders contain three additional provisions, which also appear in the mortgage or deed of trust

Answer 521

The acceleration clause provides that if a borrower defaults, the lender has the right to accelerate the maturity of the debt—to declare the entire debt (plus accrued interest and costs) due and payable immediately, even though the terms of the mortgage originally allow the borrower to amortize the debt in regular payments over a period of years. Without the acceleration clause, the lender would have to sue the borrower every time a payment became due and in default (late).

Answer 522

When a loan is paid in installments over a long term, the total interest paid by the borrower can exceed the principal of the loan. If such a loan is paid off before its full term, the lender collects less interest from the borrower. For this reason, some lenders include a prepayment penalty clause in the promissory note, requiring that the borrower pay a prepayment penalty against the unearned portion of the interest for any payments made ahead of schedule. A loan that does not have a prepayment penalty clause will include a prepayment privilege clause, which allows the borrower to prepay a portion or all of the outstanding balance without penalty. Lenders in North Carolina are not permitted to charge a prepayment penalty on any residential loan with an original balance of $150,000 or less that is the first lien on the borrower's primary residence. Also, federal law prohibits lenders from charging a prepayment penalty on any FHA-insured VA-guaranteed loan.

Answer 523

Read all Frequently, when a conventional real estate loan is made, the lender wishes to prevent some future purchaser of the property from being able to assume that loan without the lender's permission, particularly at its original rate of interest. For this reason, some lenders include a due-on-sale clause, also known as an "alienation clause", in the note. A due-on-sale clause provides that on sale of the property by the borrower to a buyer who wants to assume the loan, the lender has the choice of either declaring the entire debt to be due and payable immediately or permitting the buyer to assume the loan at current market interest rates. Use of this clause triggers the acceleration clause. The absence of a due-on-sale clause would permit a loan assumption without the lender's prior consent.

Answer 524

payment in arrears; payment in advance

Answer 525

amortized That is, as regular level payments are made, each payment is broken down and applied first to the interest owed, with the rest of the payment applied to the principal amount—over a term of perhaps 15 years or 30 years. At the end of the term, the full amount of the principal and all interest due is reduced to zero.

Answer 526

direct reduction loans

Answer 527

simple interest

Answer 528

loan-to-value ratio (LTV) The lower the ratio of debt to value, the higher the down payment by the borrower will be. For the lender, the higher down payment means a more secure loan, which minimizes the lender's risk. For instance, if a property is worth $100,000, an 80% loan would equal $80,000, and the borrower would make a $20,000 down payment.

Answer 529

Read all state usury laws Charging interest in excess of this rate is called usury and is illegal. Loans made to corporations are generally exempt from usury laws. Usury laws are state laws, but federal law preempted state law in this situation when the Depository Institutions Deregulation and Monetary Control Act of 1980 specifically exempted from state interest limitations all federally-related residential first mortgage loans made after March 31, 1980. This Act was passed to continue the availability of mortgage loans in the early 1980s when interest rates hit 18% while most state usury limits were below that rate. Federally related loans are those made by federally chartered institutions or those insured or guaranteed by a federal agency. The exemption includes loans used to finance manufactured housing (the federal term for mobile homes) and the acquisition of stock in a cooperative housing corporation. North Carolina exempts all residential first deeds of trust from state usury laws.

Answer 530

Read all discount points The number of points charged varies, depending on the difference between the interest rate and the required yield and on the average time the lender expects the loan to be outstanding. While most loans have an average term of 30 years, the average life of all loans is actually 11 years to 12 years because loans are usually paid off much sooner, when the borrower sells the property or refinances the loan. Lenders calculate that it takes an average of six to eight discount points to increase the yield 1%, with eight points being the rule of thumb; therefore, it is said that one point will increase the yield about one-eighth percent. Points can be charged on FHA-insured, VA-guaranteed, and conventional loans. Discount points should not be confused with the loan origination fee charged by most lenders, which is an administrative expense for generating the loan. Unlike points, loan origination fees are not prepaid interest; they are an expense that must be paid to the lender, typically 1% of the loan amount regardless of any discount points that might also be charged. IN PRACTICE Interest payments made under a mortgage loan secured by a first or second home are deductible for federal income tax purposes if the combined loan amounts do not exceed $1 million. This deduction, in effect, reduces the borrower's total cost of housing for the year. Interest deductions are limited, however, to the interest paid on an initial loan amount or refinancing no greater than the purchase price of the home plus capital improvements, unless the loan proceeds are used for qualified medical or educational purposes. Points (prepaid interest) paid at the time of financing a home purchase are fully deductible for the year paid by the buyer. Points on a loan to finance property improvements also are fully deductible for the year paid. Points paid on a loan refinancing may be deductible. If advance payments of loan principal are made, there is no increase in the deduction. If the entire loan is prepaid, however, any undeducted points may be deducted for that year. A tax expert should be consulted to accurately determine all tax liability and advantage.

Answer 531

debt service Amortization literally means to kill the debt.

Answer 532

the fixed rate-level payment mortgage This may also be referred to as a level-payment, simple interest loan.

Answer 533

A mortgagor may choose an interest-only payment plan that calls for periodic payments of interest only, with the principal to be paid in full at the end of the loan term in a balloon payment. This is known as a term loan, or a straight loan. Historically, such plans were used for construction loans and second mortgages, but consumers occasionally used them for residential first mortgage loans. Prior to the 1930s, the only form of mortgage loan available was the straight-payment loan, payable in full after a relatively short term, such as three years to five years. The high rate of foreclosure on such loans in the depression years prompted the introduction and use of the more manageable long-term amortized loans that are now the norm. The popularity of term loans in recent years as first mortgages for primary residences in combination with very low or no down payment requirements is thought to have contributed to the huge number of foreclosures currently being experienced.

Answer 534

Adjustable-rate mortgages (ARMs); published index Generally, interest rate adjustments are limited to one per period, and a maximum amount of increase or decrease may be made over the life of the loan. Certain regulations may enable a lender to adjust the interest rate on a monthly basis. The borrower is usually given the right to repay the loan in full without penalty whenever the interest rate changes.

Answer 535

The original rate charged, which is stated in the closing documents, is called the note rate.

Answer 536

The interest rate on the outstanding balance of the loan is increased or decreased according to the movements of a named publicly published index. A very popular index used by lending institutions is the short-term U.S. Treasury bill rate, but many other indices are available and used.

Answer 537

The amount of interest a lender charges over and above the index rate is called the margin. For example, if the most recent one-year Treasury bill rate was 3.25%, the lender could add a 2% margin and charge the borrower a 5.25% interest rate on the outstanding loan balance. The amount of the margin remains fixed for the entire life of the loan; it is the movement of the index rate that causes the ARM interest rate to fluctuate.

Answer 538

Rate caps limit the amount the interest rate may increase or decrease in any one adjustment period, called the anniversary or periodic interest rate cap. They also limit the amount the interest rate can increase over the entire life of the loan, which is called the lifetime or life of loan cap.

Answer 539

The payment cap, which sets a maximum amount for payment changes, protects the mortgagor against the possibility of individual payments that the mortgagor cannot afford. With a payment cap, a rate increase can result in negative amortization—an increase in the loan balance. For instance, suppose a borrower's rate increases a full 1%. For this borrower a 1% rate increase translates into a payment increase of $65 a month. However, the payment cap limits the increase to $45 a month. During that adjustment period, the borrower will be paying $20 a month less than the amount required to pay the full principal and interest payment. So, each month, $20 is added to the principal balance. This is negative amortization.

Answer 540

This establishes how often the loan rate may change. Common adjustment periods are every year (a one-year ARM), every three years (a three-year ARM), and every five years (a five-year ARM), or some combination.

Answer 541

Lenders may offer a conversion option, which permits the mortgage to be converted from an adjustable-rate to a fixed-rate loan at certain intervals during the life of the mortgage. The option is subject to certain terms and conditions for the conversion.

Answer 542

illustrates the effect interest rate fluctuations and periodic caps have on an adjustable-rate mortgage. Obviously, without rate caps and payment caps, a mortgage's interest rate could fluctuate wildly over several adjustment periods, depending on the behavior of the index to which it is tied In Adjustable-Rate Mortgage, the borrower's rate ranges from a low of 5.9% to a high of 9.5%. Such unpredictability makes personal financial planning difficult; borrowers are much more likely to default on an adjustable rate mortgage than a fixed-rate mortgage. On the other hand, if the loan had a lifetime rate cap of 7.5%, the borrower's rate would never go above that level, regardless of the index's behavior. Similarly, a lender would want a floor to keep the rate from falling below a certain rate (here, 6.5%). The shaded area in the figure shows how caps and floors protect against dramatic changes in interest rates.

Answer 543

A flexible payment plan, such as a graduated payment mortgage (GPM), allows a mortgagor to make lower monthly payments for the first few years of the loan (typically the first five years) and larger payments for the remainder of the term, when the mortgagor's income is expected to have increased. The interest on a GPM is fixed throughout the life of the loan. However, in the early years of the loan, the monthly payments are lower than the payments required to fully amortize the loan. This results in negative amortization. As each payment is made, the unpaid interest is added to the principal balance, resulting in an increasing loan balance for the first few years. The monthly payments then increase at stated intervals throughout the loan term, eventually making up for the negative amortization and paying off the loan in full by the end of the loan term. Generally, this type of loan is used to enable first-time buyers and buyers in times of high interest rates to purchase real estate.

Answer 544

partially amortized

Answer 545

The growing-equity mortgage, or rapid-payoff mortgage, makes use of a fixed interest rate, but payments of principal are increased according to an index or a schedule. The total payment, therefore, increases, but the borrower's income is expected to keep pace, and the loan is paid off more quickly. (Note: equity is the borrower's financial interest in the property; that is, the value of the property minus all outstanding mortgages and other liens.)

Answer 546

Government influences, primarily the Federal Reserve System, but also the Home Loan Bank System and the Office of Thrift Supervision The primary mortgage market The secondary mortgage market

Answer 547

Due to the severe financial situations experienced since 2007, the U.S. Congress passed sweeping legislation to prevent future abusive and deceptive lending practices. The most notable and far-reaching legislative action affecting the real estate industry and real estate financing is the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the Dodd-Frank Act.

Answer 548

Consumer Financial Protection Bureau (CFPB) CFPB enforces regulations for banks, most credit unions, and mortgage-related businesses. CFPB is also tasked with administering all the major laws and regulations that touch mortgage lending and will be discussed in detail elsewhere in this text: Truth in Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, Secure and Fair Enforcement for Mortgage Licensing Act, and the Interstate Land Sales Full Disclosure Act. Note: One express mandate of the Dodd-Frank Act was that the CFPB consolidate the duplicate lender disclosures under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), creating the TRID (TILA.RESPA Integrated Disclosure) rules, effective October 3, 2015.

Answer 549

The role of the Federal Reserve System (the Fed) is to maintain sound credit conditions, help counteract inflationary and deflationary trends, and create a favorable economic climate. It does this by regulating the supply of money and interest rates. The Federal Reserve System divides the country into 12 Federal Reserve Districts, each served by a Federal Reserve Bank. All nationally chartered banks must join the Fed and purchase stock in its district reserve banks. Qualified state-chartered banks may also join the Fed.

Answer 550

The Fed regulates the flow of money and interest rates in the marketplace through its member banks (and other depository institutions) by controlling their reserve requirements and discount rates. The Fed also can regulate the money supply through theFederal Open Market Committee, which buys and sells U.S. government securities on the open market. The sale of securities removes the money paid by buyers from circulation. When it buys them, it infuses its own reserves back into the general supply.

Answer 551

The Federal Reserve System requires that each member bank keep a certain amount of assets on hand as reserve funds. These reserves are unavailable for loans or any other use. This requirement not only protects customer deposits, but it also provides a means of manipulation for the flow of cash in the money market. By increasing its reserve requirements, the Fed in effect limits the amount of money that member banks can use to make loans. When the amount of money available for lending decreases, interest rates rise. By causing interest rates to rise, the government can slow down an overactive economy by limiting the number of loans that would have been directed toward major purchases of goods and services. The opposite is also true—by decreasing the reserve requirements, the Fed can encourage more lending. Increased lending causes the amount of money circulated in the marketplace to rise, while simultaneously causing interest rates to drop.

Answer 552

Federal Reserve member banks are permitted to borrow money from the district reserve banks to expand their lending operations. The discount rate is the rate charged by the Fed when it lends to its member banks. The federal funds rate is the rate recommended by the Fed for the member banks to charge each other on short-term loans. These rates form the basis on which the banks determine the percentage rate of interest they will charge their loan customers. The prime rate, the short-term interest charged to a bank's largest, most creditworthy customers, is strongly influenced by the Fed's discount rate. In turn, the prime rate is often the basis for determining a bank's interest rate on other loans, including mortgages. These rates are usually higher than the prime rate. In theory, when the Fed's discount rate is high, bank interest rates are high. When bank interest rates are high, fewer loans are made and less money circulates in the marketplace. On the other hand, a lower discount rate results in lower overall interest rates, more bank loans, and more money in circulation.

Answer 553

The primary mortgage market is made up of the lenders that originate mortgage loans. These lenders make money available directly to borrowers. From a borrower's point of view, a loan is a means of financing an expenditure; from a lender's point of view, a loan is an investment. All investors look for profitable returns on their investments. For a lender, a loan must generate enough income to be attractive as an investment Income on the loan is realized from the following two sources: Finance charges collected at closing, such as loan origination fees and discount points Recurring income, that is, the interest collected during the term of the loan An increasing number of lenders look at the income generated from the fees charged in originating loans as their primary investment objective. Once the loans are made, they are sold to investors. In addition to the income directly related to loans, some lenders derive income from servicing loans for other mortgage lenders or investors who have purchased the loans. Servicing involves such activities as collecting payments (including insurance and taxes), accounting, bookkeeping, preparing insurance and tax records, processing payments of taxes and insurance, and following up on loan payment and delinquency.

Answer 554

Savings associations, or thrifts, and commercial banks. These institutions are known as fiduciary lenders because of their fiduciary obligations to protect and preserve their depositors' funds. Mortgage loans are perceived as secure investments for generating income and enable these institutions to pay interest to their depositors. Fiduciary lenders are subject to standards and regulations established by government agencies such as the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS). These agencies govern the practice of fiduciary lenders. The various government regulations are intended to protect depositors against the reckless lending that characterized the savings and loan industry in the 1980s.

Answer 555

Mortgage brokers also may be real estate brokers who offer these financing services in addition to their regular real estate brokerage activities. Many state governments are establishing separate licensure requirements for mortgage brokers to regulate their activities.

Answer 556

The secondary mortgage market purchases, services, and sometimes re-sells existing mortgages and mortgage-backed securities created by the primary market lenders. This process replenishes funds to the primary mortgage market so they can originate more mortgage loans for the house-buying public, thereby helping homeownership become more affordable for all Americans.

Answer 557

Fannie Mae, Ginnie Mae, and Freddie Mac These three agencies are sometimes referred to as government-sponsored enterprises or GSEs.

Answer 558

In September 2008, Fannie Mae, originally named the Federal National Mortgage Association (FNMA), became a federally owned enterprise that provides a secondary market for mortgage loans—conventional loans as well as FHA and VA loans. Until that time, Fannie Mae was a privately owned corporation that issued its own stock. Fannie Mae buys a block or pool of mortgages from a lender in exchange for mortgage-backed securities that the lender may keep or sell. Fannie Mae was instrumental in developing the uniform underwriting guidelines that helped assure investors of the quality of the mortgage-backed securities. As the oldest and largest of the secondary mortgage market institutions, a visit to the Fannie Mae website will yield a wealth of information.

Answer 559

Ginnie Mae, originally called the Government National Mortgage Association (GNMA), exists as a corporation without capital stock and has always been a division of HUD. Ginnie Mae is designed to administer special-assistance programs and work with Fannie Mae in secondary market activities. Fannie Mae and Ginnie Mae can join forces in times of tight money and high interest rates through their tandem plan. Basically, the tandem plan provides that Fannie Mae can purchase high-risk, low-yield (usually FHA) loans at full market rates, with Ginnie Mae guaranteeing payment and absorbing the difference between the low yield and current market prices. Ginnie Mae also guarantees investment securities issued by private offerors (such as banks, mortgage companies, and savings associations) and is backed by pools of FHA and VA mortgage loans. The Ginnie Mae pass-through certificate lets small investors buy shares in a pool of mortgages that provides for a monthly pass through of principal and interest payments directly to certificate holders. Ginnie Mae guarantees such certificates.

Answer 560

Freddie Mac, originally the Federal Home Loan Mortgage Corporation (FHLMC), functioning as a government-owned enterprise similar to Fannie Mae, provides a secondary market for mortgage loans, primarily conventional loans originated by savings associations. Freddie Mac has the authority to purchase mortgages, pool them, and sell bonds in the open market with the mortgages as security.

Answer 561

A conventional loan is a loan that is not backed—that is, made, insured, or guaranteed—by any government agency. In other words, the lender bears all the risk of borrower default when making a conventional loan. A conventional loan is viewed as the most secure loan because its loan-to-value ratio (LTV) is lowest. A mortgage loan is generally classified based on its LTV, which is the ratio of debt to value of the property. Value is the sales price or the appraised value, whichever is less. The lower the ratio of debt to value, the higher the down payment by the borrower will be. For the lender, the higher down payment means a more secure loan, which minimizes the lender's risk. For instance, if a property is worth $100,000, an 80% loan would equal $80,000, and the borrower would make a $20,000 down payment.

Answer 562

Conforming loan guidelines for first mortgages secured by one to four family unit residences include a maximum loan amount; a minimum down payment; limits on seller contributions; and borrower qualifying ratios. The maximum loan amounts are set annually based on a formula utilizing average house prices. Loan limits have historically been uniform for the contiguous states with higher limits for Alaska, Guam, Hawaii, and the U.S. Virgin Islands. The Housing and Economic Recovery Act of 2008 has expanded the definition of conforming loan to allow higher loan limits in high cost areas as determined by the Federal Housing Finance Agency. Due to this change, maximum loan limits should be verified for specific areas. Most guidelines require a 5% minimum down payment (although some have required less) that necessitates the purchase of private mortgage insurance (PMI). Generally, the borrower must personally provide at least 5% of the purchase price even if family members contribute additional down payment. Maximum contributions by the seller (or any third party) vary with different loan conditions but are capped at 6% of the sales price. Borrower qualification requirements will be discussed later. Mortgage loans that do not meet all these guidelines are called nonconforming loans. Subprime loans made to borrowers who cannot meet the qualification requirements for a conforming loan are a good example of nonconforming loans. In addition, nonconforming loans include loans that exceed the maximum loan limits for conforming loans and are called jumbo loans.

Answer 563

One way a borrower can obtain a conventional mortgage loan with a smaller down payment is under a PMI program. When the LTV ratio is higher than a specified percentage, typically 80%, the lender requires additional security to minimize its risk. The borrower purchases insurance from a PMI company as additional security to insure the lender against borrower default. LTVs of up to 95% of the appraised value of the property are possible with PMI. PMI protects a certain percentage of a loan, usually 20% to 30%, against borrower default. Normally, the borrower is charged a fee for the first year's premium at closing and a monthly renewal fee while the insurance is in force. The premium may be financed or the fee at closing may be waived in exchange for slightly higher monthly payments. When a borrower has limited funds for investment, these alternative methods of reducing closing costs are very important. Because only a portion of the loan is insured, once the loan is repaid to a certain level (usually 75% or 70% of the value of the property), the lender may agree to allow the borrower to terminate the coverage. Practices for termination vary from lender to lender. In order to avoid purchasing private mortgage insurance during recent years, some borrowers would utilize piggyback loans. By taking out a first and second mortgage simultaneously, the PMI requirement could be avoided. The most common arrangements were either 80/10/10 or 80/15/5; both used a first mortgage LTV of 80%, a second mortgage LTV of either 10% or 15%, and then down payment in the amount of 10% or 5%.

Answer 564

have reached the 80% loan-to-value (LTV) threshold; have a good payment history; be current on the loan; satisfy any requirement of the holder of the mortgage for certification that the borrower's equity in the property is not subject to a subordinate lien; and satisfy any requirement of the holder of the mortgage for evidence (of a type established in advance and made known to the borrower by the servicer) that the value of the property has not declined below the original value.

Answer 565

a borrower with a good payment history will have PMI canceled when he or she has built up equity equal to 20% of the purchase price or the appraised value. Lenders are required by the law to inform borrowers of their right to cancel PMI. Before this law was enacted, lenders could (and often did) continue to require monthly PMI payments long after borrowers had built up substantial equity in their homes and the lender no longer risked a loss from the borrower's default.

Answer 566

National Housing Act to encourage improvement in housing standards and conditions, provide an adequate home-financing system through insurance of housing credit, and exert a stabilizing influence on the mortgage market. The FHA was the government's response to the lack of housing, the excessive foreclosures, and the collapsed building industry that occurred during the Great Depression.

Answer 567

Department of Housing and Urban Development (HUD), neither builds homes nor lends money to purchase single-family housing. Rather, it insures loans on real property made by approved lending institutions. The FHA does not insure property; it insures lenders against loss in case of borrower default. An FHA-insured loan, then, refers not to a loan that is made by the agency but to a loan that is insured by it. FHA-insured loans are made by FHA-approved lenders, which are free to set the interest rates on the loans.

Answer 568

Title II, Section 203(b), fixed-interest-rate loans for 10 years to 30 years on one-family to four-family residences.

Answer 569

When a mortgage loan is insured by the FHA and the real estate given as security is a single-family dwelling or an apartment building with no more than four units, the borrower has the privilege of prepaying the debt without penalty. On the first day of any month before the loan matures, the borrower may pay the entire debt or an amount equal to one or more monthly payments on the principal. The borrower must give the lender written notice of intention to exercise this privilege at least 30 days beforehand; otherwise, the lender has the option of charging up to 30 days' interest in lieu of such notification. This is also known as having no prepayment penalty.

Answer 570

All FHA assumptions require the assuming buyer to qualify, and the borrower must occupy the property. All FHA loans made under the 203(b) program are for owner-occupied properties only. The original borrower may still be secondarily liable for an assumed loan repayment.

Answer 571

Title I: Home improvement loans are covered under this title. Such loans are for relatively low amounts and have repayment terms of no longer than 7 years and 32 days. Title II, Section 234: Loans made to purchase condominiums are covered under this program, which in most respects is similar to the basic 203(b) program. Title II, Section 245: Graduated payment mortgages are allowed under this program. Depending on interest rates, the LTV ratio of such loans might range from 87% to 93%. Title II, Section 251: Adjustable-rate mortgages (ARMs) are allowed under this program. The interest rate cannot change more than 1% per year or more than 5% over the life of the loan.

Answer 572

Under the Servicemen's Readjustment Act of 1944 and subsequent federal legislation, the Department of Veterans Affairs (VA) is authorized to guarantee loans to purchase or construct homes for eligible veterans. (Unremarried widows or widowers of veterans may also be eligible.) Eligibility status varies and is determined by length of service during peace or war times. Nonactive veterans wishing to use their entitlement cannot have received a dishonorable discharge from the military. The VA also guarantees loans to purchase mobile homes and plots on which to place them. GI loans assist veterans in financing the purchase of homes with little or no down payment at comparatively low interest rates. From time to time, the VA issues rules and regulations setting forth the qualifications, limitations, and conditions under which a loan may be guaranteed. ( Comparison of FHA and VA Loan Programs compares VA and FHA loan programs.)

Answer 573

Loans made between 12/1/86 and 12/15/89 are fully assumable after 12 months on owner-occupied loans; seller remains liable for 5 years. Loans made since 12/15/89 require prior approval of assumptor; seller is released from liability.

Answer 574

To determine what portion of a mortgage loan the VA will guarantee, the veteran must apply for a certificate of eligibility. This certificate does not mean that the veteran will automatically receive a mortgage. It merely sets forth the maximum guarantee the veteran is entitled to, which is frequently called the entitlement or eligibility. Note that the maximum amount of the guarantee refers to the amount the lender would receive from the VA in case of default and foreclosure if the sale did not bring enough to cover the outstanding balance. Ordinarily, a veteran obtains a loan from a VA-approved lending institution; only in locations where financing is not reasonably available, such as in isolated rural areas, does the VA actually lend money. Although there is no maximum VA loan amount, lenders will generally loan up to four times a veteran's available entitlement without a down payment. Although an eligible veteran's basic entitlement is currently $36,000, the guaranty in loans over $144,000 can be increased to a maximum of $89,912 thereby allowing a 100% loan of up to $359,650 ($89,912 max. guaranty × 4 = $359,648). The loan amount can be larger if the veteran is willing and able to make a down payment. Maximum loan terms are 30 years for one-family to four-family dwellings and 40 years for farms. Residential property (up to a four-family unit) purchased with a VA loan must be owner-occupied. Interest rates are freely negotiable between the lender and the borrower. The VA also will issue a certificate of reasonable value (CRV) for the property being purchased, stating its current market value based on a VA-approved appraisal. The CRV places a ceiling on the amount of a VA loan allowed for the property; if the purchase price is greater than the amount cited in the CRV, the veteran may either pay the difference in cash or must be permitted to terminate the purchase agreement without penalty. Also, the seller may agree to lower the purchase price to the amount named in the CRV, or both the buyer and the seller may renegotiate the sale and each make a concession on the price.

Answer 575

Even though a veteran has used a veteran's entitlement to purchase a home once, the veteran still may be eligible for another VA loan. If the veteran is selling a current VA-financed home, entitlement can be restored. For instance, if the first house is sold and the original VA loan is paid off, the veteran's entitlement will be restored and the veteran will be eligible for another VA home loan that can be used to purchase a replacement home. A veteran's entitlement also can be restored if the veteran sells the home to another veteran who is willing to assume the existing loan and if the buyer's entitlement is substituted for the entitlement of the selling veteran. The basic rule, with little exception, is that veterans can only have one property in their name at a time that is or was financed by a VA-guaranteed loan.

Answer 576

As with an FHA-insured loan, the borrower under a VA-guaranteed loan can prepay the debt at any time without penalty.

Answer 577

The U.S. Department of Agriculture (USDA) offers programs to help purchase or operate family farms. It also provides loans to help purchase or improve single-family homes in rural areas—generally areas with a population of fewer than 10,000 that are not suburbs of urban areas. Loans are made to low-income and moderate-income families, and due to subsidized interest rates, the interest rate charged can be as low as 1%, depending on the borrower's income. The loan programs fall into two categories—guaranteed loans, made and serviced by a private lender and guaranteed by the agency, and direct loans from the agency.

Answer 578

The Rural Housing Service Agency administers housing programs for low- to moderate-income rural residents. These types of loans include Direct Single Family Housing Loans and Guaranteed Single Family Housing Loans, among others.

Answer 579

The Direct Single Family Housing Loan is designed for families with low to very low income—80% or less of county median income. These loans can be used to buy, build, improve, or repair rural homes. Eligibility requirements include (1) a rural area with a population of less than 10,000, (2) families who are without safe and decent housing, and (3) families to whom financing is not otherwise available. Availability of funds is based on annual appropriations. Loans may be made up to 100% of the appraised value. Interest rates are normally set at market rate, and the term of the loan is typically 33 years, but may be as long as 38 years. Applicants pay some costs, such as the credit report fee, appraisal fee, and closing costs, and the applicant must have good credit.

Answer 580

The Guaranteed Single Family Housing Loan is designed for moderate-income families who have limited down payment capability. Loans are processed by approved lenders and guaranteed by the U.S. government. Eligibility requirements are similar to the direct loan as discussed above. Maximum loan amounts range from $78,660 to $116,850, depending on the county in which the property is located. Interest rates are negotiable and fixed, with a 30-year loan term.

Answer 581

A purchase money mortgage is owner-financing given at the time of purchase to facilitate the sale and refers to the instrument given by the purchaser to a seller who takes back a note and mortgage for part or all of the purchase price. Takes back refers to the fact that the seller has taken back some interest in the property in exchange for financing. It may be a first or second deed of trust, and it becomes a lien on the property when the title passes. The borrower holds title under a purchase money mortgage. In the event of foreclosure on a purchase money mortgage, this lien takes priority over judgment liens against the borrower and over mechanics' liens. In North Carolina, a seller-lender is not entitled to a deficiency judgment. In other states, the term purchase money mortgage can refer to any loan obtained to purchase a property. It is useful to contrast another form of owner financing, the installment sale, with purchase money mortgages.

Answer 582

A package loan includes not only the real estate but also all fixtures and appliances installed on the premises. In recent years, this type of loan has been used extensively in financing furnished condominium units. Such loans usually include the kitchen range, refrigerator, dishwasher, garbage disposal, washer and dryer, freezer, and other appliances, as well as furniture, drapes, and carpets. In other words, the lender has packaged both real and personal property in the same loan.

Answer 583

A bridge loan is a short-term loan to cover the period between termination of one loan and the beginning of another loan. It's typically taken out for a period of two weeks to three years pending the arrangement of larger or longer-term financing. For example, purchasers of a new home may need bridge financing between the construction loan and a permanent loan. Consumers also use bridge loans when they can't sell their current residence but wish to acquire a new one. The bridge loan may be a second mortgage under these circumstances.

Answer 584

A blanket mortgage covers more than one parcel of land and usually is used to finance subdivision developments, though it can be used to finance the purchase of improved properties as well. These loans usually include a provision, known as a partial release clause, so that the borrower may obtain the release of any one lot or parcel from the lien by repaying a definite amount of the loan at closing without triggering a due-on-sale clause for the rest of the financed property.

Answer 585

Open-end mortgages act as a line of credit or equity line, allowing the mortgagee to make additional future advances of funds to the mortgagor, and are generally set up as home equity loans. The mortgagee may have a prior lien for the amount of additional future advances if the mortgagee is obligated to make advances, as in construction loans. For unobligated future advances, the lien may be subordinate to other liens that may be created before the additional advancements are made.

Answer 586

A construction loan is made to finance the construction of improvements on real estate—homes, apartments, office buildings, and so forth. Under a construction loan, the lender commits the full amount of the loan but makes partial installment payments or draws as the building is being constructed. Installment payments are made to the general contractor for that part of the construction work that has been completed since the previous payment. Prior to each payment, the lender inspects the construction site. The general contractor must provide the lender with adequate waivers of lien releasing all mechanic's lien rights for the work covered by the payment. This kind of loan generally bears a higher interest rate because of the risks assumed by the lender. These risks include the inadequate releasing of mechanics' liens just referred to, possible delays in completing the building, and the financial failure of the contractor or subcontractors. The lender always runs the risk that the loan funds will run out before the construction has been completed. Construction financing is generally short-term, or interim, financing. The borrower is expected to arrange for a permanent loan—also known as an end loan or a take-out loan—that will repay, or take out, the construction financing lender when the work is completed. Construction loans normally pose a greater degree of risk to lenders than any other types of loans.

Answer 587

A buydown is a way to lower the initial interest rate on a mortgage or deed of trust loan. Perhaps a homebuilder wishes to stimulate sales by offering a lower-than-market interest rate. Or, a first-time residential buyer may have trouble qualifying for a loan at the prevailing rates; relatives or the sellers might want to help the buyer qualify. In any case, a lump sum is paid in cash to the lender at closing. The payment offsets (and so reduces) the interest rate and monthly payments during the mortgage's first few years. Typical buydown arrangements reduce the interest rate by 1% to 3% over the first year to third year of the loan term. After that, the rate rises. The assumption is that the borrower's income also will increase and that the borrower will be more able to absorb the increased monthly payments. A common type of buydown is called the 3-2-1 buydown. The interest rate is bought down by 3% in the first year, 2% in the second year, and 1% in the third year. For the fourth and succeeding years, the interest rate is the fixed note rate.

Answer 588

Home equity loans are a source of funds for homeowners who wish to finance the purchase of expensive items; consolidate existing installment loans on credit card debt; or pay for medical, educational, home improvement, or other expenses. This type of financing has been used increasingly, partly because tax laws no longer allow deductibility of interest on debts not secured by real estate (consumer interest). Home equity loans are secured by the borrower's residence, and some or all of the interest charged may be deductible. A home equity loan can be taken out as a fixed loan amount or as an equity line of credit. With the home equity line of credit (HELOC), the lender extends a line of credit that the borrowers can use whenever they want. The borrowers receive their money through checks sent to them, deposits made in a checking or savings account, or a book of drafts the borrowers can use, up to their credit limit.

Answer 589

A reverse mortgage is one in which regular monthly payments are made to the borrower, based on the equity the homeowner has invested in the property given as security for the loan. A reverse mortgage allows senior citizens on fixed incomes to utilize the equity buildup in their homes without having to sell the property. The borrower is charged a fixed rate of interest, and the loan is eventually repaid from the sale of the property or from the borrower's estate on the borrower's death.

Answer 590

A mortgage on land that has no prior mortgage lien on it is a first mortgage

Answer 591

When the owner of this land executes another loan for additional funds, the new loan becomes a second mortgage, or a junior mortgage, when recorded. The second lien is subject to the first lien; the first (or senior mortgage) has prior claim to the value of the land pledged as security. Because second loans represent greater risk to lenders, they are usually issued at higher interest rates and for shorter terms. First mortgage is first priority and the junior mortgage is in second priority.

Answer 592

The normal recordation priority of mortgage liens may be changed by the execution of a subordination agreement, in which the first lender subordinates its lien to that of the second lender. To be valid, such an agreement must be signed by both lenders. Subordination agreements may be contained in the mortgage itself or they may be separate agreements filed for recordation.

Answer 593

Today, with the exception of FHA loans and a few nonconforming loans, the interest rates available to borrowers are largely based on credit scores, which can range from 300 to 850.

Answer 594

All the applicant's judgments must be paid in full, ideally more than two years prior to application, for approval on a FHA, VA, or conforming loan. Nonconforming loan requirements may allow judgments to remain unpaid if the title is not impacted. Normally, bankruptcies or foreclosures in an applicant's credit history must be older than three to four years. The long-term negative impact of participation in a short sale or deed in lieu of foreclosure on creditworthiness is still vague.

Answer 595

A rate lock is a guarantee from mortgage lenders that they will give mortgage loan applicants a certain interest rate, at a certain price, for a specific time period. Usually borrowers lock in their interest rate a few weeks before settlement. A longer rate lock typically is more expensive for the borrower. The price for a mortgage loan is typically expressed as points paid to obtain a specific interest rate. If market rates rise after the rate is locked, borrowers will still get the lower rate, to the lender's detriment. But there's a downside: if rates fall after the rate is locked, borrowers might not be able to take advantage of that opportunity.

Answer 596

A computerized loan origination (CLO) system is an electronic network for handling loan applications through remote computer terminals linked to several lenders' computers. With a CLO system, a buyer can select a lender and apply for a loan right from the brokerage office.

Answer 597

First, the proposed monthly housing expense can usually be no more than 28% of the borrower's monthly gross income. Note that the proposed monthly housing expense includes principal and interest payments, plus monthly property taxes, insurance payments, and homeowner association dues, if applicable. Second, the proposed monthly housing expense plus the buyer's other long-term recurring monthly debts can usually total no more than 36% of the buyer's monthly gross income. Recurring monthly debts include items such as charge card payments, child support payments, personal loan payments, and car payments. These qualifying ratios can change, depending on the LTV ratio of the loan. The borrower must qualify on both ratios or they do not qualify for the loan. The larger the down payment the borrower makes, the easier it will be to qualify.

Answer 598

however, the maximum proposed-housing-expense-to-income ratio is 31%, and the maximum proposed-total-monthly-debt-to-income ratio is 43%. These ratios are calculated in the same manner as the conventional ratios discussed above. The FHA ratios are not dependent on the loan's LTV ratio, unlike conventional ratios. FHA ratios remain constant, regardless of the amount of the down payment. Note that FHA standards are somewhat easier to meet than conventional standards.

Answer 599

The VA uses only the total-monthly-debt-to-income ratio, which the VA has set at 43% of the borrower's monthly income. Instead of a second ratio, the VA uses the residual-income method. With this qualifying method, buyers must have a certain amount of cash left over after paying their monthly housing expenses and other recurring debts. The VA publishes a table of how much residual income is required for buyers. The amount varies, depending on the number of dependents the buyer has and the geographic region in which the buyer lives. As with the two ratios used by conventional and FHA lenders, VA borrowers must qualify under both the total-monthly-debt-to-income ratio and the residual-income method before the loan will be approved. If an applicant's residual income exceeds the required amount by more than 20%, that applicant may qualify for a VA loan, even if the applicant's total-monthly-debt-to-income ratio exceeds the 43% maximum.

Answer 600

Truth in Lending Act, the Equal Credit Opportunity Act, and the Real Estate Settlement Procedures Act. North Carolina legislation adds regulation through the Predatory Lending Act, the Residential Mortgage Fraud Act, and the North Carolina Secure and Fair Enforcement Mortgage Licensing Act.

Answer 601

TILSRA was passed by Congress and became effective October 1, 1992. The Federal Reserve Board issued a Revised Regulation Z (RRZ) that details the rules and regulations for TILSRA.

Answer 602

Regulation Z, which was promulgated pursuant to the Truth in Lending Act (TILA), requires that credit institutions inform borrowers of the true cost of obtaining credit so that the borrowers can compare the costs of various lenders and avoid the uninformed use of credit. Regulation Z applies when credit is extended to individuals for personal, family, or household uses and when the amount of credit is $25,000 or less. Regardless of the amount, Regulation Z always applies when a credit transaction is secured by a residence. Regulation Z requires that the consumer be fully informed of all finance charges as well as the true annual interest rate before a transaction is consummated. The finance charges must include any loan fees, finder's fees, service charges, and points, as well as interest. In the case of a mortgage loan made to finance the purchase of a dwelling, the lender also must compute and disclose the annual percentage rate (APR) but does not have to indicate the total interest payable during the term of the loan. APR is frequently thought to be the interest rate because both are expressed as percentages. APR is the relationship of all finance charges to the loan amount and will always be higher than the interest rate. Also, the lender does not have to include as part of the finance charge such actual costs as title fees, legal fees, appraisal fees, credit report fees, survey fees, and closing expenses. The APR tells the borrower what the true cost of borrowing is because it includes all of the fees directly related to the loan, not just the interest payments. However, there is more than one way to calculate an APR which makes it difficult for borrowers to comparison shop for loans.

Answer 603

MDIA stands for the Mortgage Disclosure Improvement Act which went into effect on July 30, 2009. The MDIA mandates a seven-business day wait to close and the requirement to re-disclose an inaccurate APR at least three business days prior to closing for consumers on residential mortgage loans. TILA-RESPA requires the lender to disclose to the borrower (1) the loan's APR, (2) all finance charges associated with the loan, (3) the total number and amount of all payments, and (4) the total amount financed. These are called the four chief disclosures that must appear in the Loan Estimate form (LE).

Answer 604

Regulation Z provides strict regulation of real estate advertisements that include mortgage financing terms. General phrases like liberal terms available may be used, but if specifics, called trigger terms, are given, the advertiser must comply with this regulation. Generally, if any numbers related to the loan are disclosed, a trigger term has been hit and total financing term disclosure is mandatory. Under the provisions of Regulation Z, the APR—which includes all finance charges—rather than the interest rate alone, must be stated. The total finance charge must be specified as well. Specific credit terms, such as down payment, monthly payment, dollar amount of the finance charge, or term of the loan, MAY NOT be advertised unless the following information is set forth as well: cash price; required down payment; number, amounts, and due dates of all payments; and APR. Penalties Regulation Z sets the penalties for noncompliance. The penalty for violation of an administrative order enforcing Regulation Z is $10,000 for each day the violation continues. A fine of up to $10,000 may be imposed for engaging in an unfair or a deceptive trade practice. In addition, a creditor may be liable to a consumer for twice the amount of the finance charge, for a minimum of $100 and a maximum of $1,000, plus court costs, lawyer's fees, and any actual damages. Willful violation is a misdemeanor punishable by a fine of up to $5,000 or one year's imprisonment or both. The TILA and Regulation Z are administered by the Consumer Financial Protection Bureau. The TILA has been amended numerous times since it was enacted in 1968.

Answer 605

The federal Equal Credit Opportunity Act (ECOA), in effect since 1975, prohibits lenders and others who grant or arrange credit to consumers from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant is of legal age), dependence on public assistance, or exercise of the consumer's rights under this Act. In addition, lenders and other creditors must inform all rejected credit applicants, in writing, within 30 days, of the principal reasons why credit was denied or terminated.

Answer 606

The federal Fair Credit Reporting Act, effective since 1970, gives individuals the right to check their own credit reports and demand that mistakes be corrected. Credit bureaus are required to limit the credit information they provide to the previous seven years (except for bankruptcies, which can stay on credit records for 10 years). Individuals who have been denied credit based on information found in a credit report can examine their credit report at no charge. Under the Fair and Accurate Credit Transaction Act (FACT Act), individuals who have not been denied credit but want to examine their credit report may now receive one free credit report per year from each of the national credit bureaus. At this time, here are the three major credit bureaus where consumers can access their credit report and learn about protecting their credit identity: Equifax, Experian, and TransUnion. There is also a joint website for ordering the free annual report.

Answer 607

Loan fraud involves making any false representations in order to obtain a loan for a larger amount of money than the borrower is entitled to under the lender's guidelines. Misrepresentations may involve value of the collateral land, amount of down payment, personal information about the borrower, amount of closing expenses, undisclosed rebates or credits to a party, or occupancy. In almost every loan fraud, some false documentation was submitted to lenders, closing attorneys, real estate brokers, or other involved parties. Federal loan fraud statutes apply to all residential and commercial real estate transactions. Any false statement to a lender is a federal felony crime punishable by fines up to $1,000,000 and/or imprisonment for up to 30 years. Residential Mortgage Fraud Act In December 2007, North Carolina passed state-specific mortgage fraud legislation that made violation on one mortgage loan a felony. The penalty for commission of a felony includes incarceration, forfeiture of the property, or restitution. A real estate broker should report suspected mortgage fraud to the appropriate regulatory authority.

Answer 608

With the passage of the Predatory Lending Act in 1999, North Carolina became the first state to enact comprehensive predatory lending laws. This North Carolina law that applies to lenders and addresses permissible fees that may be charged in connection with home loans secured by the first mortgage or first deed of trust. The Act's main provisions include the following: To impose restrictions and limitations on high-cost loans To revise the permissible fees and charges on certain loans To prohibit unfair or deceptive practices by mortgage brokers and lenders To provide for public education and counseling about predatory lenders

Answer 609

The federal Real Estate Settlement Procedures Act (RESPA) was created to ensure that the buyer and seller in a residential real estate transaction involving a new first mortgage loan have knowledge of all settlement costs. This important federal law experienced major revisions in 2015. RESPA requires that all transaction charges to the parties be clearly itemized on the Closing Disclosure form that makes loan fraud harder to conceal.

Answer 610

Mortgage factors or loan constants are used to determine the monthly amount of principal and interest. For example, assume that the Millers are borrowing $350,000 at 4.5% annual interest for 30 years. Using the mortgage factor chart ( Mortgage Factor Chart), it can be determined that the mortgage factor for this loan is 5.07. Divide the amount of the loan ($350,000) by $1,000, which equals 350, to determine the number of thousands borrowed. Multiply 350 by the mortgage factor of 5.07, which equals $1774.50 in monthly principal and interest payment.

Answer 611

Wood-frame

Answer 612

offer easy accessibility and maintenance because everything is on one floor. Owners have no need to make frequent trips upstairs or to use high ladders to paint second-story exterior surfaces. Although ranch houses are usually moderate-sized and affordable, they are the most expensive to build per square foot because the two most expensive elements of a house, the roof and the foundation, must cover the same amount of space as the living area of the house.

Answer 613

The split-level home, sometimes called a tri-level, takes advantage of uneven terrain with a minimum of grading to prepare the lot. Two-story homes are the most economical to build on a cost per square foot basis because they offer twice the living area for the cost of only one foundation and roof. A story and a half (1½ story) house functions much like a two-story residence except that the upper level's ceiling is the underside of the roofline, and there is no attic space above that living area. Just due to height of the construction alone, maintenance and access of multilevel homes is more difficult than a single-story home. Contemporary designs usually combine elements of one-story, two-story, or split-level homes with a lot of open space, multilevel rooflines, and skylights or windows. Contemporary designs are particularly popular in scenic areas due to the generous use of large windows.

Answer 614

The foundation rests on footings, which are usually made of concrete that is poured into trenches or forms that have been dug or placed beneath the soil line. Footings must be wider than the structure being supported and are typically 16 inches wide and 6 inches to 8 inches deep. The bottom of each footing must be located below the frost line to avoid the shifting that can be caused when the ground freezes. Footings are the lowest part of construction and serve to spread the weight of the structure over the ground.

Answer 615

Foundation walls rest on top of the footings and provide a surface upon which the flooring is built. Foundation walls are usually made out of poured concrete, masonry block, or brick and are typically 8 inches to 12 inches thick.

Answer 616

Piers (columns), usually made of masonry block, may be required to support the flooring between the foundation walls when a crawlspace or basement construction is used.

Answer 617

Foundation walls with a crawl space are very popular in North Carolina residential construction. Lifting the living space above the ground aids with ventilation, moisture control, and prevention of pest infestation. Proper ventilation of the crawl space through the adequate use of foundation vents works in conjunction with proper grading of the soil to drain moisture away from under the building. Additional moisture control may be accomplished by waterproofing the foundation walls and/or installing a vapor barrier in the crawl space.

Answer 618

Basements are basically story-high crawl spaces that may be used for storage or living space, depending on the quality of finish used. While basement space is popular, it is also expensive to construct, especially in the central and eastern parts of North Carolina due to the high water table and the additional excavation below the frost line.

Answer 619

A concrete slab is flat, horizontal, reinforced with steel bars, and poured directly on the level ground to create the foundation without use of a crawlspace or basement.

Answer 620

Because North Carolina is home to many wood-destroying insects, builders must be very careful to protect structures from damage from such pests. All firewood or wood materials must be removed from around the foundation construction site and the decking of the residence to discourage termites and other wood-destroying insects. In new construction, the soil near the foundation walls and piers must be chemically treated. Any lumber used in the construction that comes in contact with the ground must be pressure-treated. Frequently, the company that treats the soil will offer a termite bond that is renewable and transferable to provide infestation protection warranty.

Answer 621

The floor framing consists of the sill (the lowest horizontal wooden part of framing), pieces of treated lumber that are placed on top of the foundation walls. Floor joists are then attached to the sills at 16-inch or 24-inch intervals. Because the floor joists must support the entire weight of the floor, they typically cannot span the entire width of the structure. Instead, girders, which rest on top of piers, are used to support the joists between sills. The subfloor is then attached to this system of joists and girders. The subfloor is usually made of sheets of plywood or pressboard, which are laid on top of the joists and girders. Finally, the subfloor is covered with the floor covering, such as vinyl, carpeting, tile, or hardwood strips.

Answer 622

Wall framing consists of studs, vertical lumber spaced about 16 inches apart. The sole plate connects the studs to the flooring; the top plate connects the studs to the ceiling framing. Headers, two pieces of lumber joined together to form a beam, are used to give extra support to wall framing where a window or door will be positioned. This type of framing is called platform framing. Two other less typical types of framing include balloon framing and post and beam framing. With balloon framing, a single system of lengthy wall studs is used. The studs run from the foundation up to the ceiling (through both the first and second stories). With post and beam framing, extra-large framing members are used—either 4 × 4 inch or 6 × 6 inch. These large posts can be placed farther apart than the traditional 16-inch distance between wall studs.

Answer 623

Ceiling joists are attached to the top plate of the wall and carry the weight of the roof. Rafters, the sloping members of the roof frame, connect the ceiling joists and the ridge boards (the highest part of the construction). The rafters support the decking or other roofing materials. An alternative method to using ceiling joists, rafters, and ridge boards is truss framing. The roof truss is a prefabricated triangular structure that serves the same functions as the ceiling joists, rafters, and ridge boards but is easier and quicker to install. The overhang of the roof is called the eave, which is made up of the fascia board, the soffit, and the frieze board. Gutters are usually attached to the fascia board. Ventilation for the attic is usually located in the soffit of the eaves. The frieze board is a sometimes decorative board at the top of the exterior wall directly under the soffit that prevents penetration of the elements through the joint between the exterior wall and roof.

Answer 624

To build the exterior walls, sheathing is added to the wall framing to insulate the house from the elements. Several types of materials are used for sheathing, including particleboard, foam sheathing, and plywood. While tar paper (asphalt-treated paper or felt) was commonly used in the past to insulate a home, plastic house wraps have largely replaced asphalt felt as the water-resistive barrier required by codes. Exterior siding is then added to the sheathing. Exterior siding may be wood-manufactured hardboard (e.g., Masonite®), brick veneer, fiber cement board, vinyl, aluminum, stucco, or synthetic stucco (e.g., EIFS). In older existing homes, wood is the most common siding material; however, in recent years, most homes built in North Carolina use one of the other types of siding. Siding protects the home from the elements and provides a pleasing look.

Answer 625

Windows allow for ventilation, light, a view, and style. Today, windows are made of wood, aluminum, and some composite materials, plus they normally use multipane insulated glass for energy efficiency. There are three basic types of windows: (1) the sliding windows that have sash units that slide either vertically (sometimes called double-hung) or horizontally past each other to open or close the window opening; (2) the swinging windows that include the casement (a sash unit is hinged on one side to fully swing outward), jalousie (glass louvers), hopper (hinged on the bottom), and awning (hinged on the top) styles; and (3) the fixed windows that do not open include bay, bow, picture, and Palladian styles. In addition to providing access, exterior doors add to the style of a home. Exterior doors are usually made of wood, steel, or a combination of wood and glass (such as French doors) with a solid core for maximum insulation value. The major types of exterior doors include: (1) the flush door that is of smooth finish construction and appearance; (2) the panel door that has multiple raised or indented panels; (3) the sliding glass door that is frequently used as access to patios or decks; and (4) the French door that provides a more upscale decorative door with glass panels. The major components of window and door framework are the same: the sill is the bottom, the jamb is the side, and the header is the top of the framing. In a window, the glass panel that moves is the sash. The sash used to be composed of several small rectangular windowpanes that were joined together by pieces of wood. The cross hatch of dividing wood is comprised of the muntins (horizontal pieces) and the mullions (vertical pieces). Refer to Window Types for examples of popular window types.

Answer 626

Roofing materials must be able to withstand the elements and provide water protection to the structure. Of course, roofing materials also add to the home's style and character. The most common types of roofing materials are composition shingles (made of asphalt and fiberglass), wood shingles or shakes, and layers of roofing felt interspersed with tar or asphalt (called a built-up roof). Sometimes, the same sheathing that is attached to the exterior walls for insulation purposes also is attached to the rafters and is called decking. The gable roof is the most common roof design. Refer to Roof Designs for examples of popular roof designs. The slope of the roof is measured by the pitch, which is the number of inches of rise per foot of horizontal distance. The larger the rise per foot, the steeper the slope will be.

Answer 627

Insulation is an important factor in any building. Today's energy-conscious consumers are anxious to buy homes that take little energy to heat and cool. Materials used to insulate homes include batts or blankets of insulating materials (which come in rolls), loose fill insulation (which is blown into open spaces) or foam. In addition to this interior insulation, the sheathing or house wrapping materials used under the exterior covering of the building would add extra insulating value. Of course, any materials containing asbestos are prohibited.

Answer 628

The insulation value of materials is expressed as an R value. The higher the R-value, the more resistant the material is to the transfer of heat. Building codes require different elements of each home to have different minimum R-values. For example, North Carolina building codes require R-19 insulation in floors, R-13 in walls, and R-30 in ceilings. Higher R-values are required in the colder, mountainous sections of the state. In addition to installing the appropriate insulation throughout the building, property owners are wise to weatherstrip around exterior doors and windows. Weatherstrips of felt, metal, or other substance are used to block drafts between the door or window sash and the casing. Caulking around openings can also reduce energy loss.

Answer 629

Several types of heating, ventilation, and air-conditioning (HVAC) systems exist. The most common forms include central heating units fueled by gas, oil, or electricity; heat pumps; and forced warm air systems (which use a central blower). Some less common power sources are coal, wood, steam, and electric wire. The most efficient type of heating system is warm forced air, even though other systems can still be found, especially in older homes. Electric baseboard heating system, wood stoves, electric heaters, and kerosene heaters have all had periods of popularity that have waned. Fireplaces, while aesthetically appealing, can be a drain on the pocketbook since they usually act as an exhaust vent for the home's air. Modern air conditioning systems, much like the heating systems, are generally forced air systems powered by electricity, gas or oil. Occasionally, room-sized heating and air units are installed for small areas that may be separated from the rest of the living area, such as an office over the garage.

Answer 630

which provide energy on a year-round basis, have gained popularity over the last few years but are still not as common as gas, oil, or electric heating systems. Solar heating systems can be either passive or active. Passive solar systems utilize the natural heating power of direct sunlight captured through the use of southern exposure windows and brick interior walls that radiate heat back into the room at night. Active systems require a system of collection, storage, and distribution throughout the house. Generally, a solar heating system will require an auxiliary system to supplement the solar power.

Answer 631

the heat pump provides a combination of heating and air conditioning. The heat pump pulls heat from the outside winter air and pumps it into the house and then reverses the process to remove heat from the residence during the summer months. This system functions best in temperate climates and usually has an auxiliary system to supplement when nature is too hot or too cold for efficiency.

Answer 632

The British Thermal Unit (BTU) is a measure of heat and is used in rating the capacity of air-conditioning and heating equipment. While R-values are stated as smaller numbers, BTU numbers are in the thousands. A 4,000 BTU furnace might be called a two-ton unit. Many larger homes utilize a dual system (one system for the first floor and a second system for the upper floor) while some incorporate zoned heating for different zones of the residence.

Answer 633

North Carolina Department of Insurance.

Answer 634

The code consists of hundreds of pages of requirements on the structure of buildings and their electrical and plumbing systems. Local municipalities may adopt more stringent building codes to raise the quality of construction in their jurisdiction. Each municipality has a building department that issues building permits and enforces the building code by inspecting buildings during construction. Before a structure can be occupied, the building department must issue a certificate of occupancy (CO), which means that the construction has been completed in a safe, satisfactory manner.

Answer 635

Even though a property owner does not need a general contractor's license to build or renovate their personal property, they will usually need to apply for the appropriate building permits. Although there is significant variance about what activities require a permit among county and city inspectors, there appears to be a fairly consistent agreement about three types of work that prompt the need for a permit: any electrical, plumbing, or structural work. The definition of structural work seems to be the type of work that is the most subject to interpretation. A broker listing a property that has had additions or major improvements should verify that the work was permitted. Unapproved space is a material fact since unpermitted space may have to be taken down or pass inspection retroactively and may not be insurable.

Answer 636

HUD. Some of these standards may be stricter than the state building codes.

Answer 637

In North Carolina, anyone who contracts to construct a building for others that costs more than $30,000 must obtain a general contractor's license from the state. Different classifications of licenses exist for different types of construction. For example, single-family home construction requires a residential building classification.

Answer 638

An appraisal is an estimate or opinion of value, completed by a licensed appraiser, of a specific property as of a specific date. Appraisal reports are relied on in important decisions made by mortgage lenders, investors, public utilities, government agencies, businesses, and individuals.

Answer 639

Certified residential appraisers usually appraise residential properties; certified general appraisers

Answer 640

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) was passed by Congress for the primary purpose of overhauling regulations of the thrift industry. However, a major portion of this Act was for the regulation of appraisers performing appraisals for federally related loan transactions. This Act established many federal agencies charged with the task of setting appraisal standards and minimum qualification requirements. The Appraisal Qualifications Board sets qualification standards and requirements for state-certified appraisers. The Appraisal Standards Board sets minimum standards of practice. In North Carolina, appraisers are licensed and certified through the North Carolina Appraisal Board after meeting minimum education and experience requirements and passing state examinations. The licensed appraiser need not have a real estate license to perform a real estate appraisal.

Answer 641

Due to the increased need for opinions of value by lienholders of distressed properties in the aftermath of the real estate industry crisis in 2007, many real estate brokers were enticed to perform broker price opinions (BPOs) for entities that had no potential of becoming legitimate real estate brokerage clients, which were illegal at that time. Despite strong resistance from the NCREC and the North Carolina Appraisal Board, the 2012 North Carolina General Assembly enacted amendments to both the North Carolina Real Estate License Law and the North Carolina Appraisal Act that now allows North Carolina real estate brokers to provide BPOs for a fee to nonbrokerage clients. The authorization in the license law and the NCREC rules for such activity must be read together to fully understand the stipulations for full compliance with the law. Only active full brokers (nonprovisional) may perform a BPO or CMA (terms are synonymous per statute) for a fee as long as the BPO is not intended to determine value of a property for the purpose of originating a mortgage loan or any purpose where an appraisal is required by law. A BPO must be in writing and must contain all the contents required by law. A broker's BPO/CMA may only estimate the "probable selling price" or "probable leasing price" of a property, not the "value" or "worth" of a property. Any estimate of a property's "value" is considered to be an "appraisal" and must be performed by a licensed or certified real estate appraiser. Please note that the NCREC does not consider a CMA performed for general brokerage services by full or provisional brokers to constitute a "fee" as defined by the statute.

Answer 642

1. The BPO/CMA must be performed in accordance with the provisions of Article 6 of the Real Estate License Law and Commission Rule 58A .2200 2. BPOs/CMAs may only estimate the probable selling price or probably leasing price of a property, not the value or worth of the property. 3. BPOs/CMAs must be performed for no fee when a provisional broker is involved. 4. BPOs/CMAs can be performed for a fee by a non provisional broker and must be performed in accordance with Article 6. Note: NCREC expects every BPO/CMA performed by a licensee to be performed in a competent manner without any undisclosed conflict of interest, even if no fee is received for the BPO/CMA 5. Real estate agents must follow the requirements of Rule 58-A.2202 when performing a CMA/BPO. a. Proper knowledge of the area b. Personal inspection of the property c. Possible sales price can be expressed using a range d. BPO/CMA can not be performed for the purpose of a loan e. Must be in writing

Answer 643

Value is an abstract word with many acceptable definitions. In a broad sense, value may be defined as the relationship between an object desired and a potential purchaser. It is the power of a good or service to command other goods or services in exchange. In terms of real estate appraisal, value may be described as the present worth of future benefits arising from the ownership of real property. For a property to have value in the real estate market, it must have four characteristics, which can be remembered by the acronym DUST: Demand: the need or desire for possession or ownership backed by the financial means to satisfy that need Utility: the capacity to satisfy future owners' needs and desires; how future owners can make good use of the property Scarcity: a finite supply Transferability: the relative ease of transfer of ownership rights from one person to another; often relates to clear title and satisfactory physical condition

Answer 644

Even though a given parcel of real estate may have many different kinds of value at the same time, such as insurance value, assessed value, et cetera, generally the goal of an appraiser is to estimate market value. The market value of real estate is the most probable price that a property will bring in a competitive and open market, allowing a reasonable time to find a purchaser who buys the property with knowledge of all the uses to which it is adapted and for which it is capable of being used. Included in this definition are the following key points: Market value is the most probable price a property will bring. Payment must be made in cash or its equivalent. Buyer and seller must act without undue pressure. A reasonable length of time must be allowed for the property to be exposed in the open market. Both buyer and seller must be well informed of the property's use and potential, including its assets and defects.

Answer 645

Market value is an opinion of value based on an analysis of data that may include not only an analysis of comparable sales but also an analysis of potential income, expenses, and replacement costs (less depreciation). Market price, on the other hand, is what a property actually sells for—its sales price. Theoretically, the market price should be the same as the market value. Market price can be taken as accurate evidence of current market value, but only if the conditions essential to market value exist. However, the market price may not be indicative of market value. There are circumstances under which a property may be sold below market value, as when the seller is forced to sell quickly or when a sale is arranged between relatives.

Answer 646

An important distinction exists between market value and cost. Cost represents past expenditures on the property: what the owner has spent on the property. One of the most common misconceptions about valuing property is that cost represents market value. Cost and market value may be equal and often are when the improvements on a property are new. But more often, cost does not equal market value.

Answer 647

Social force, economic force, political force, environmental conditions

Answer 648

Social forces. Social forces that affect property values include trends in marriage and divorce rates, family size and longevity, and desirability of social activities. Example: Cristen and Chason Jones purchased their home in 1965. At that time, the average people in a household was 5 and the adults' ages averaged 32 years old. Thirty five years later, their three-bedroom home may now be worth considerably less, as there are less children and the adults currently living there are looking to move to a warmer climate.

Answer 649

Economic forces include income and employment levels, the rate of property taxation, current interest rates, and general economic growth. Example: Brian has a job in Chicago that pays him $250,000 annually, and he wishes to purchase a new five-bedroom home to occupy. The cost of housing an hour and fifteen minutes away is considerably less than it is in downtown Chicago. Brian will have to consider either buying a smaller home or moving to a suburb outside the city limits with a longer commute.

Answer 650

Political forces include government activities such as zoning and building codes, growth management, environmental legislation, and tax structures. Example: Bella is moving from Ohio to Pitt County. She has noticed that certain areas seem to be less developed than others. When she asked why, Bella was told that there was currently no utility infrastructure available in those areas. They are on the City planning radar, but current residents are fighting City Council to keep the area small and until it is resolved, they can not move ahead with the plans.

Answer 651

Environmental conditions that affect property values include topography, location, climate, size, shape, proximity to major arterials, jobs, and public transportation. Example: Stella's family has owned a home in the Outer Banks for 30 years. During the last hurricane, most of the beach that the home sat on was washed away. When the home was originally built it was two streets over from the beach but due to rising waters and stronger hurricanes, the home is now in danger of eroding into the ocean. Stella's family can neither sell the home nor move it to safety for fear it would not be able to withstand the move.

Answer 652

The most profitable single use to which a property is adapted and for which it is needed, or the use that is likely to be in demand in the reasonably near future, is its highest and best use.

Answer 653

The principle of substitution states when several items with essentially the same amenities and utilities are available, the item with the lowest price will attract the most demand. In other words, a consumer will purchase what is perceived to be the best buy for the money. This principle is the cornerstone of the sales comparison approach to value (discussed in detail later). For example, if house A and house B are equally desirable properties with similar assets and house A is selling for $160,000 and house B is selling for $170,000, virtually every buyer will choose house A.

Answer 654

This principle states that the value of a property will change if the supply decreases and the demand either increases or remains constant—and vice versa. For example, the last lot to be sold in a residential area where the demand for homes is high would probably be worth more than the first lot sold in that area, assuming normal economic conditions exist. Supply and demand in real estate is sometimes referenced as being in a buyer's market or a seller's market.

Answer 655

Conformity means that maximum value is realized if the use of land conforms to existing neighborhood standards. In residential areas of single-family houses, for example, buildings should be similar in design, construction, size, and age. Subdivision protective covenants rely on the principle of conformity to ensure maximum future value. Building a home that is significantly bigger than surrounding houses violates the principle of conformity. This mistake is commonly referred to as overbuilding the neighborhood.

Answer 656

This principle holds that value can increase or decrease in anticipation of some future benefit or detriment affecting the property. For example, the value of a house could be affected by rumors that an adjacent parcel may be converted to some different use in the near future. In other words, current value is being affected by future possibilities whether based on fact or rumor.

Answer 657

This principle affirms that the value of any component of a property is defined by what its addition contributes to the value of the whole or what its absence detracts from that value. For example, the cost of installing an air-conditioning system and remodeling an older office building may be greater than is justified by the increase in market value (a function of expected net increases) that may result from the improvement to the property. In residential properties, an owner sometimes will make a super-improvement such as installing solid mahogany kitchen cabinets. While these cabinets may be quite attractive, the average buyer will not pay for the added cost of this overimprovement.

Answer 658

This principle states that profits tend to attract competition. For example, the success of a retail store may motivate investors to open similar stores in the area. This tends to mean less profit for all stores concerned unless the purchasing power in the area increases substantially. Note that excess profit tends to attract ruinous competition.

Answer 659

No physical or economic condition remains constant. Real estate is subject to natural phenomena, such as tornadoes, fires, and routine wear and tear of the elements. The real estate business also is subject to the changing demands of its market, as is any business. It is an appraiser's job to study the past to be better able to predict the effects of natural phenomena and the behavior of the marketplace in the future. Appraisers must also be sensitive to the stage of progression within the neighborhood life cycle. Most residential neighborhoods go through four phases of the cycle of change: growth, stability, decline, and renewal. The area's position within the life cycle will affect value.

Answer 660

showing the final estimate of value, the date of the estimate, signatures, and license numbers of the appraisers

Answer 661

The sales comparison approach The cost approach The income capitalization approach

Answer 662

In the sales comparison approach, also known as the market data approach, an estimate of value is obtained by comparing the subject property (the property under appraisal) with recently sold comparable properties (properties similar to the subject). This approach is most often used in valuing single-family homes and land. Because no two parcels of real estate are exactly alike, each comparable property must be compared with the subject property, and the sales prices of the comparables must be adjusted for any dissimilar features. The principal factors for which adjustments must be made fall into four basic categories: Date of sale. An adjustment must be made if economic changes occur between the date of sale of a comparable property and the date of the appraisal. Location. An adjustment may be necessary to compensate for location differences. For example, similar properties might differ in price from neighborhood to neighborhood or even within the same neighborhood. Physical features. Physical features that may require adjustment include age of building, size of lot, landscaping, construction, number of rooms, square footage of living space, interior and exterior condition, presence or absence of a garage, a fireplace or an air conditioner, and so forth. Terms and conditions of sale. This consideration becomes important if a sale is not financed with a standard mortgage. Be sure that the sale was an arm's-length transaction, which means that the property did not sell for an unusually high or low price because of a special relationship between the buyer and seller. An example would be a low-price sale between a parent and child.

Answer 663

(preferably within the past 120 days) For example, in markets where prices have been very stable for a long period of time, a comparable that has closed within 12-15 months may be acceptable. However, in markets where there have been drastic increases or decreases in market conditions, a more recent comp no older than six months may be more appropriate. To have a reliable estimate of value, at least three similar comparable properties should be located.

Answer 664

The adjusted sales prices of the comparables represent the probable value range of the subject property. The appraiser then correlates the adjusted sales prices of the comparables to determine a single market value estimate for the subject property. The correlation is the result of a weighted averaging process; never use simple averaging of the adjusted sales prices. The comparable that is most similar to the subject property is given more weight than the other comparables when calculating the single estimate of value.

Answer 665

An informal version of the sales comparison approach is used by real estate brokers to help a seller-client set a realistic asking price for residential real estate or to help a buyer-client determine a reasonable purchase price in an active market. This informal version is called a comparative market analysis (CMA).

Answer 666

active listings, expired listings, and closed sales

Answer 667

a nonclient is owed market data but not interpretation of market data

Answer 668

The cost approach to value is also based on the principle of substitution, which states that the maximum value of a property tends to be set by the cost of acquiring an equally desirable and valuable substitute property. The cost approach consists of five steps: Estimate the value of the land as if it were vacant and available to be put to its highest and best use, based on the sales comparison approach, because land cannot be depreciated. Separate the land from the improvements, and estimate the current cost of constructing the building(s) and site improvements based, in general, on cost data and experience. Estimate the amount of accrued depreciation of the improvements resulting from physical deterioration, functional obsolescence, or economic obsolescence. Deduct the accrued depreciation from the estimated construction cost of the new building(s) and the contributory depreciated value of site improvements. Add the estimated value of the land to the depreciated cost of the building(s) and site improvements to determine the total property value.

Answer 669

Reproduction cost is the dollar amount required to construct an exact duplicate of the subject building at current prices. Reproduction cost is mainly used when appraising historical property.

Answer 670

Replacement cost is the construction cost, at current prices and using modern materials and methodology, of a property that is not necessarily an exact duplicate but serves the same purpose or function as the original property. Replacement cost is most often used in appraising because it eliminates obsolete features and takes advantage of current construction materials and techniques.

Answer 671

An appraiser using the cost approach computes the reproduction or replacement cost of a building using one of the following methods: Square-foot method. The cost per square foot of a recently built comparable structure is multiplied by the number of square feet in the subject building. The square-foot method is the most common method of cost estimation. The example in Cost Approach to Value uses the square-foot method. For some property, the cost per cubic foot of a recently built comparable structure is multiplied by the number of cubic feet in the subject structure. Unit-in-place method. The replacement cost of a structure is estimated based on the construction cost per unit of measure of individual building components, including material, labor, overhead, and builder's profit. In the unit-in-place method, most components are measured in square feet; although items like plumbing fixtures are estimated by unit cost. Quantity-survey method. An estimate is made of the quantities of raw materials needed to replace the subject structure (lumber, plaster, brick, et cetera) as well as of the current price of such materials and their installation costs. These factors are added to indirect costs (building permit, survey, payroll taxes, builder's profit) to arrive at the total replacement cost of the structure. The quantity-survey method is similar to the approach a building contractor takes when preparing a bill for the construction of a building.

Answer 672

In a real estate appraisal, depreciation (a loss in value for any reason) refers to any condition that adversely affects the value of an improvement to real property. Land does not depreciate because it is here forever and can always be put to its highest and best use when economically and legally feasible to do so.

Answer 673

Repairs that are physically possible and economically feasible and will result in an increase in appraised value equal to or exceeding their cost fall into this category. Routine maintenance, such as painting and roof replacement, is an example of curable physical deterioration.

Answer 674

Repairs to major structural components of a building, which deteriorate at different rates, may not be economically feasible and therefore fall into this category. Examples are load-bearing walls and foundations.

Answer 675

Physical or design features that are no longer considered desirable by property buyers but can be replaced or redesigned at low cost constitute this class of depreciation. For example, outmoded fixtures, such as plumbing, are usually easily replaced. Room function might be redefined at no cost if the basic room layout allows it. A bedroom adjacent to a kitchen, for instance, may be converted to a family room.

Answer 676

Currently undesirable physical or design features that cannot be remedied easily are considered functionally obsolete. Many older multistory industrial buildings are considered less suitable than one-story buildings, for example. An office building that cannot be air-conditioned because of the cost of duct installation also suffers from functional obsolescence. A residential example might be a home with five bedrooms but only one bath.

Answer 677

Caused by factors outside the subject property, economic (environmental or external or locational) obsolescence cannot be considered curable. For instance, proximity to a nuisance, such as a polluting factory, is an unchangeable factor that cannot be cured by the owner of the subject property. economic obsolescence also may be referred to as locational obsolescence.

Answer 678

In determining a property's depreciation, most appraisers use the breakdown method in which depreciation is broken down into the three classes with separate estimates for curable and incurable factors in each class. Depreciation is difficult to measure, and the older the building, the more difficult it is to estimate. The easiest but least precise way to determine depreciation is the age-life method, which uses the effective age of a building and its economic (useful) life. When the cost of an asset is depreciated evenly over its useful life, this is called straight-line method of depreciation. Depreciation is assumed to occur at an even rate over a structure's economic life, the period during which it is expected to remain useful for its original intended purpose. (Compare this with a property's actual life, the period during which the improvements are expected to remain standing.) To derive the amount of annual depreciation, the property's cost is divided by the number of years of its expected economic life. Much functional obsolescence and all economic obsolescence, however, can be evaluated only by considering the actions of buyers in the marketplace.

Answer 679

The cost approach is most helpful in the appraisal of special-purpose buildings such as schools, churches, and public buildings. Such properties are difficult to appraise using other methods because there are seldom any local sales to use as comparables, and these properties ordinarily do not generate income. In the appraisal of special-purpose properties, an inexperienced appraiser may complete only a cost approach analysis and may estimate market value based on the results of that approach alone. But just because a structure was originally constructed for a certain purpose does not mean that it is necessarily the highest and best use for the property. This being the case, a market analysis of other properties having the same projected highest and best use is very important in this type of appraisal. Adjustments must be made for such variables as modification costs, location, time of sale, lot sizes, and the like, to make valid comparisons between the comparables and the subject property.

Answer 680

The income capitalization approach to value, also known as the income approach, is based on the present worth of the future rights to income. It assumes that the income derived from a property will control the value of that property. The income approach is used for valuation of income-producing properties—apartment buildings, office buildings, shopping centers, and the like. Many properties have potential for producing income but do not because they are owner-occupied. In such cases, the appraiser projects income and expenses based on market studies of similar income-producing properties. In using the income approach to estimate value, an appraiser must work through the following steps: Estimate the annual potential gross income using rents from comparable properties, as well as income from other sources such as concessions, laundry facilities, and vending machines. Based on market experience, deduct an appropriate allowance for vacancy and rent collection losses to arrive at the effective gross income. Based on appropriate operating standards, deduct the annual operating expenses of the real estate from the effective gross income to arrive at the annual net operating income (NOI). Operating expenses include taxes, insurance, maintenance, repairs, and reserves for replacement. Management costs are always included as operating expenses, even if the current owner manages the property and does not show a cost for this item. Mortgage payments of principal and interest, are debt service and are not considered operating expenses. For example, if a property owner spends $35,000 a year on operating expenses and $25,000 a year on mortgage payments, the $35,000 would be subtracted from effective gross income to determine the property's net income; the $25,000 of mortgage payments (debt service) would not. Appraisers always assume a cash purchase and therefore an individual's mortgage expenses are not relevant to this calculation. Estimate the price a typical investor would pay for the income produced by this particular type and class of property. This is done by estimating the rate of return (or yield) that an investor will demand for the investment of capital in this type of building. This rate of return is called the capitalization (or cap) rate and is determined by comparing the relationship of NOI to the sales prices of similar properties that have sold in the current market. For example, a comparable property that produces an annual NOI of $15,000 is sold for $187,500. The capitalization rate is $15,000 ÷ $187,500, or 8%. If other comparable properties sell at prices that yield substantially the same rate, it may be assumed that 8% is the rate that the appraiser should apply to the subject property. Note that the cap rate is inversely related to the market value of the property; as one goes up, the other goes down. Finally, the capitalization rate is applied to the property's annual NOI, resulting in the appraiser's estimate of the property value.

Answer 681

Certain properties, such as one-family or two-family homes, are not generally purchased as income properties. As a substitute for a more elaborate income analysis, the gross rent multiplier (GRM) method may be used in appraising such properties. The GRM relates the sales price of a property to its expected rental income. (Gross monthly income is used for residential property; gross annual income is used for commercial and industrial property.) The formula is as follows: Sales Price = Gross Rent Multiplier Rental Income To establish an accurate GRM, an appraiser should have recent sales and rental data from at least three properties similar to the subject property. The most appropriate GRM can then be applied to the estimated fair market rental of the subject property to arrive at its market value. The formula would then be the following:

Answer 682

Appraising has become the most specialized branch of real estate. Before awarding their designations, the major recognized appraisal associations require a four-year college degree or the equivalent, plus five years of full-time appraisal experience, in addition to passing an examination and writing acceptable appraisals. Federally related appraisals must follow the guidelines stated in Uniform Standards of Professional Appraisal Practice (USPAP). To become state-licensed, appraisers must meet educational, experiential, and examination requirements. An application and information book on becoming an appraiser can be obtained by contacting the North Carolina Appraisal at its website, http://www.ncappraisalboard.org/.

Answer 683

Mortgage interest payments on a principal residence and second homes. As of 2018, for a principal residence, a second residence, or both, the total amount of acquisition debt for which interest can be deducted cannot exceed a total of $750,000. Loan discount points. Those that are prepaid interest to reduce the loan interest rate when acquiring a residence, not a refinance, are deductible in the year of purchase. Mortgage prepayment penalties. Rare in North Carolina. Mortgage insurance premiums. If certain income requirements are met. Some loan origination fees. If they are quoted as a percent of the loan amount and if paid to obtain the loan. (Brokers and buyers should check with their tax advisers before assuming that such fees may or may not be deductible.)

Answer 684

Real property taxes paid by a homeowner also are deductible in the year paid. Note that the interest paid on overdue taxes is not deductible. The mortgage interest deduction combined with the real property tax deduction can mean a substantial annual tax savings for the homeowner. Deductions for real property taxes can be taken on a principal residence as well as on a second home; however, effective in 2018, the total of state and local taxes will be limited to a $10,000 deduction per year.

Answer 685

When a person sells real property for more than its cost, that person has received a capital gain. Capital gains, the profits realized from the sale or exchange of property, are taxed as ordinary income if it is a short-term capital gain (held 12 months or less). However, the maximum tax rate that applies to long-term capital gain (held longer than 12 months) is currently 20% (not the ordinary 39.6%). Because capital gain laws change often, check with a tax specialist before quoting any rates. The amount of the gain realized from a sale of real property depends on that property's cost basis. The cost basis (or simply, basis) of property is the owner's initial cost for the real estate (purchase price plus allowable closing expenses). The owner of a property can add to the cost basis, the cost of any physical capital improvements that add value to the property or prolong its life. Note that maintenance is not a capital improvement. This is the property's adjusted basis. (Note that the cost of ordinary repairs or maintenance does not increase the adjusted basis.) When the owner sells the property, the amount by which the amount realized (sales price minus allowable closing expenses) exceeds the property's adjusted basis is the capital gain subject to taxation. If the amount realized is less than the adjusted basis, a capital loss has occurred. Capital loss is not currently recognized on the sale of a personal residence but can frequently be used to offset capital gain in other situations. As noted before, a tax specialist should be consulted on this matter.

Answer 686

Taxpayers who sell their principal residences can take advantage of tax laws that took effect in May 1997. Under current tax law, capital gains—up to $500,000 for a married couple filing jointly and up to $250,000 for a single person or a married person filing singly—from the sale of a principal residence are excluded from taxation. There are a few restrictions on this tax benefit: (1) the seller must have occupied the property as a primary residence for two of the previous five years (residency does not have to be continuous) and (2) the exclusion is available only once every two years. Because of the first restriction, this exclusion of gain does not apply to vacation properties or second homes. Under these tax provisions, homeowners with substantial capital gains can downsize into smaller, less-expensive homes without a tax penalty (in most cases). If a seller has gains that exceed the $500,000 or $250,000 limit, those gains will be currently taxed at the maximum 20% long-term capital gains rate.

Answer 687

To qualify for tax deductions for an office in the home, that portion of the home must be used exclusively for business purposes; it must be the taxpayer's principal place of business; it must be where clients, customers, or patients are met in the normal course of business; or it must be a separate structure not attached to the dwelling. Consult with a tax expert for more details.

Answer 688

As discussed earlier, the adjusted basis in a property is roughly equivalent to the owner's investment in the property. The adjusted basis affects the amount of gain that is realized from the sale of real property. The owner of an investment property calculates the owner's basis in that property a little differently from the homeowner. The owner of income property can also add to the cost basis, the cost of any physical capital improvements (as opposed to repairs that may be expensed annually) subsequently made to the property. He must subtract from the basis any payment received for the sale of an easement on the property and/or the amount of any depreciation claimed as a tax deduction (discussed later) to arrive at the property's adjusted basis.

Answer 689

When a seller finances the sale of the seller's property (as with the use of a contract for deed or purchase money mortgage), or when the seller is to receive all or some portion of the sales price in a year or years other than the year of sale, the sale qualifies as an installment sale. For instance, a seller may agree to personally finance the sale of the property, receiving a 5% down payment, with the balance of the purchase price to be received in monthly payments over a 10-year term. The seller benefits tax-wise from this type of sale by being able to spread taxation of any gain over the term of the loan. With an installment sale, the taxpayer is taxed on a pro rata portion of the total gain as each installment actually is received. For example, if a taxpayer received a gain of $10,000 on a $100,000 contract price, her profit percentage would be 10%. If during the tax year she received $5,000 in principal payments, 10% of those payments would be taxable that year. Ten percent of $5,000 is $500. She would have to report a taxable gain of $500 in that tax year. Note that if a homeowner sells a principal residence and the gain will exceed the statutory limits of exclusion discussed previously, the homeowner may also benefit by selling the principal residence on an installment basis.

Answer 690

If a property owner has a vacation home and if it is in full use by others, certain expenses may be deductible for tax purposes. But if the owner personally uses the property for more than 14 days per year, or for more than 10% of the number of days for which the property is rented, whichever is greater, certain deductions will be disallowed.

Answer 691

Real estate investors can defer taxation of capital gains by exchanging property versus selling it and receiving taxable profit. A tax-deferred exchange offers significant tax advantages because no matter how much a property has appreciated since its initial purchase, it may be exchanged for another property and the taxpayer may be able to defer taxes on the entire gain. Note that the tax is deferred, not eliminated, so whenever the investor actually sells the newly acquired property without the use of an exchange, the capital gain will be taxable. The requirements for a tax-deferred exchange, sometimes called a Section 1031 Exchange based on the federal tax code, are fairly straightforward. First of all, there must be a property transferred (relinquished property) and a property received (replacement property). These properties must be exchanged—they cannot be sold. Both the property transferred and the property received must be held for productive use in a trade or business or for investment. (An exchange of principal residences will not qualify for tax-deferral.) Finally, the properties must be like-kind properties. Essentially, the like-kind requirement is met when real estate is exchanged for real estate. An apartment building can be exchanged for an office building or gas station, and the exchange will still qualify as like-kind. The apartment building real estate does not have to be exchanged for an apartment building to qualify. Sometimes, a property is exchanged for another property that is worth substantially more or less money. When this happens, cash or personal property may be included in the transaction to even out the value of the exchange. This cash or personal property is called boot. The party receiving boot is taxed on the value of the boot at the time of the exchange. Direct, equal-value property swaps are very rare, so most Section 1031 exchanges are delayed exchanges where the relinquished property and the replacement property are disposed of and acquired at different times. The rules for a delayed exchange are very clear and strict with deadlines that cannot be missed (time is of the essence). The North Carolina Real Estate Commission (NCREC) cautions brokers not to give advice about tax-deferred exchanges or the eligibility of property for such an exchange. Clients should be counseled to consult a tax adviser or attorney who has experience with such exchanges.

Answer 692

Depreciation, or cost recovery, allows an investor to recover the cost of an income-producing asset by taking tax deductions over the period of the asset's useful life. Even though investors usually expect the value of the property to appreciate over time, according to the tax laws all physical structures deteriorate and lose value over time. Cost recovery deductions may be taken only on personal property and improvements to land and only if they are used in a trade or business or for the production of income. Cost recovery deductions cannot be claimed on a principal residence or on land (technically, land never wears out or becomes obsolete). When depreciation is taken in equal amounts over an asset's useful life, the method used is called straight-line depreciation. For certain property purchased before 1987, it was also possible to use an accelerated cost recovery system to claim greater deductions in the early years of ownership, gradually reducing the amount deducted in each year of the useful life. For residential rental property placed in service as of January 1, 1987, the recovery period is set at 27.5 years; for nonresidential property placed in service after May 12, 1993, the recovery period is set at 39 years, using only the straight-line depreciation method. The accelerated depreciation schedule is not allowed on property purchased after 1987.

Answer 693

In addition to tax deductions for depreciation, investors may be able to deduct losses from their real estate investments. The tax laws are very complex, particularly as a result of the Tax Reform Act of 1986. The amount of loss that may be deducted depends on the following factors: Whether an investor actively participates in the day-to-day management of the rental property or makes management decisions The amount of the loss The source of the income against which the loss is to be deducted Investors who do not actively participate in the management or operation of the real estate are considered passive investors, which prevents them from using a loss to offset active income. Active income is considered to be wages, income generated from active participation in real estate management, or income from stocks, bonds, and the like. The tax code cites specific rules for active and passive income and losses and is subject to changes in the law.

Answer 694

Race: a group of people that an individual was born into or has affiliated with all of their lives Color: the actual color of the skin's pigmentation including the degree of darkness Religion: the spiritual beliefs of an individual National origin: the country in which an individual was born or from which they derive their direct ancestry (not related to citizenship) Sex: male or female gender (does not protect sexual orientation or gender identity) Handicapping condition: defined by HUD as any physical or mental impairment that substantially limits one or more major life activities, or being regarded as having such an impairment, which includes persons with AIDS and HIV Familial status: any type of family unit with at least one dependent child (under the age of 18), including pregnant women

Answer 695

The Federal Fair Housing Act is administered by the Office of Fair Housing and Equal Opportunity (OFHEO) under the direction of the Secretary of HUD. Any aggrieved person who believes illegal discrimination has occurred may file a complaint with HUD within one year of the alleged act. HUD may also initiate its own complaint. Complaints may be reported to the Office of Fair Housing and Equal Opportunity, Department of Housing and Urban Development, Washington, DC 20410, or to the Office of Fair Housing and Equal Opportunity in care of the nearest HUD regional office. Complaints also may be submitted directly to HUD using an online form. Upon receiving a complaint, HUD initiates an investigation. Within 100 days of the filing of the complaint, HUD either determines that reasonable cause exists to bring a charge of illegal discrimination or dismisses the complaint. During this investigation period, HUD can attempt to resolve the dispute informally through conciliation. Conciliation is the resolution of a complaint by obtaining assurance that the person against whom the complaint was filed (the respondent) will remedy any violation that may have occurred. The respondent further agrees to take steps to eliminate or prevent discriminatory practices in the future. If necessary, these agreements can be enforced through civil action. (Note that a North Carolina complaint filed with HUD will be referred to the North Carolina Human Relations Council for investigation because North Carolina has an equivalent state fair housing law. [See later discussion.]) The aggrieved person has the right to seek relief through administrative proceedings. Administrative proceedings are hearings held before administrative law judges (ALJs). An ALJ has the authority to award actual damages to the aggrieved person or persons and, if it is believed the public interest will be served, to impose monetary penalties. The penalties range can be up to $10,000 for the first offense, up to $25,000 for a second violation within five years, and up to $50,000 for further violations within seven years. The ALJ also has the authority to issue an injunction to order the offender to either do something (such as rent an apartment to the complaining party) or refrain from doing something (such as acting in a discriminatory manner). The parties may elect civil action in federal court at any time within two years of the discriminatory act. For cases heard in federal court, unlimited punitive damages can be awarded in addition to actual damages. The court can also issue injunctions. Errors and omissions insurance carried by brokers normally does not cover losses caused by violations of the fair housing laws. Whenever the attorney general has reasonable cause to believe that any person or group is engaged in a pattern or practice of resistance to the full enjoyment of any of the rights granted by the federal fair housing laws, the attorney general may file a civil action in any federal district court. Civil penalties may result in an amount not to exceed $50,000 for a first violation and an amount not to exceed $100,000 for second and subsequent violations. Complaints brought under the Civil Rights Act of 1866 are taken directly to federal courts. The only time limit for bringing legal action is a state's statute of limitations for torts—injuries one individual inflicts on another. Defined by HUD as any physical or mental impairment that substantially limits one or more major life activities, or being regarded as having such an impairment, which includes AIDS and HIV.

Answer 696

The North Carolina Fair Housing Act of 1983 (NGCS Chapter 41A) prohibits the same activities as the federal law (refer to the list of prohibited activities discussed under the Federal Fair Housing Act). Thus, one discriminatory act violates both federal and state laws and subjects the violator to both federal and state penalties.

Answer 697

While the state law's prohibited activities are identical to those of the federal law, the exemptions to the state Act contain substantial differences: The Federal Fair Housing Act exempts private owners who sell their own homes without the use of a real estate broker. There is no similar exemption to the state Fair Housing Act. Note that when there is a conflict between state and federal law, the most restrictive law applies: persons selling their own homes must not resort to discriminatory practices even though they are exempted by federal law. The state does, however, exempt the rental of rooms in a private home occupied by the owner. The state Act exempts the rental of a unit in a one- to four-unit residential building if the owner or one of the owner's family members lives in one of the units. The federal law exempts such a unit only if the owner lives in one of the units. The state Act exempts the rental of rooms in a single-sex dormitory. The federal law does not include this exemption (although it is doubtful that such a practice would be prosecuted as a violation of the federal law).

Answer 698

The first place to file a complaint by those who have been injured by discriminatory housing acts is the North Carolina Human Relations Commission. Complaints must be filed within one year. The Commission then begins investigating the complaint and simultaneously tries to resolve the conflict through conference, conciliation, or persuasion. If the Commission finds there are no reasonable grounds for the complaint, it is dismissed, but the injured party may still bring a discrimination suit in state court. Again, complaints must be filed within one year. However, if there are reasonable grounds to believe unlawful discrimination took place and the Commission's informal negotiation process does not work, the Commission must then dismiss the complaint and issue a right-to-sue letter to the injured party (which entitles the party to bring a court case against the accused at the complainant's own expense), or file a lawsuit in state court against the accused.

Answer 699

Blockbusting (also known as panic peddling) is the act of encouraging people to sell or rent their homes by claiming that the entry of a protected class into the neighborhood will have some negative impact on property values. Blockbusting was a common practice during the 1950s and 1960s, as unscrupulous real estate brokers profited by fueling white flight from cities to suburbs. Any message, however subtle, that property should be sold or rented because the neighborhood is undergoing changes is considered blockbusting. It is illegal to assert that the presence of members of a certain protected class will cause property values to decline, crime or antisocial behavior to increase, and the quality of schools to suffer. A critical element in blockbusting, according to HUD, is the profit motive. A property owner may be intimidated into selling a property at a depressed price to the blockbuster, who in turn sells the property to another person at a higher price. Another term for this activity is panic selling. To avoid accusations of blockbusting, brokers should use good judgment when choosing locations and methods for marketing their services and soliciting listings

Answer 700

Steering is the channeling of home seekers to particular neighborhoods based on the presence or absence of a protected class. It also includes discouraging potential buyers from considering some areas. In either case, it is an illegal limitation of a purchaser's options. The intent of steering may be either to preserve the character of a neighborhood or to change its character intentionally. Many cases of steering are subtle, motivated by assumptions or perceptions about a home seeker's preferences, based on some stereotype. Assumptions are not only dangerous—they are often wrong. The broker cannot assume that a prospective home seeker expects to be directed to certain neighborhoods or properties. Steering anyone is illegal. Brokers should always allow the client to select which properties or neighborhoods are viewed.

Answer 701

The practice of refusing to make mortgage loans or issue insurance policies in specific areas for reasons other than the economic qualifications of the applicants or the collateral value of the property offered is known as redlining. Redlining refers to literally drawing a line around particular areas. This practice is often a major contributor to the deterioration of older neighborhoods. Redlining is frequently based on racial or ethnic grounds rather than on any real objection to an applicant's creditworthiness. For example, the lender makes a policy decision that no property in a certain area is qualified for a loan, no matter who wants to buy it, because of the neighborhood's ethnic character. The Federal Fair Housing Act prohibits discrimination in mortgage lending and covers not only the actions of primary lenders but also activities in the secondary mortgage market. A lending institution can refuse a loan, but solely on sound economic grounds. Charging different loan fees or interest rates based on protected class membership by the proposed borrower also would constitute redlining. The Home Mortgage Disclosure Act requires that all institutional mortgage lenders with assets in excess of $10 million and one or more offices in a given geographic area make annual reports. The reports must detail all mortgage loans the institution has made or purchased, broken down by census tract. This law enables the government to detect patterns of lending behavior that might constitute redlining.

Answer 702

To a large extent, the laws place the burden of responsibility for effecting and maintaining fair housing on real estate brokers. Brokers must comply with the laws, which are clear and widely known. The complainant does not have to prove that the accused was guilty of actual knowledge or specific intent—only the fact that discrimination occurred. In other words, if a broker violated a fair housing law, that broker could be found guilty of discrimination even if there was no intent to discriminate.

Answer 703

Note that the National Association of REALTORS® membership has added the protected classes of sexual orientation and gender identity to the seven state and national classes.

Answer 704

Although the Americans with Disabilities Act (ADA) is not a housing or credit law, it has a significant effect on the real estate industry. The ADA is important to brokers because it addresses the rights of individuals with disabilities in employment, commercial facilities, and places of public accommodation. Real estate brokers are often employers, and real estate brokerage offices are public spaces. The ADA's goal is to enable individuals with disabilities to become part of the economic and social mainstream of society. Title I of the ADA requires that employers (including real estate brokers) make reasonable accommodations that enable an individual with a disability to perform essential job functions. Reasonable accommodations include making the work site accessible, restructuring a job, providing part-time or flexible work schedules, and modifying equipment that is used on the job. The provisions of the ADA apply to any employer with 15 or more employees. Title III of the ADA provides for accessibility to goods and services for individuals with disabilities. While the federal civil rights laws have traditionally been viewed in the real estate industry as housing-related, the practices of brokers who deal with nonresidential property are significantly affected by the ADA. Because people with disabilities have the right to full and equal access to businesses and public services under the ADA, building owners and managers must ensure that any obstacle restricting this right is eliminated. The Americans with Disabilities Act Accessibility Guidelines (ADAAG) contain detailed specifications for designing parking spaces, curb ramps, elevators, drinking fountains, toilet facilities, and directional signs to ensure maximum accessibility.

Answer 705

The federal Equal Credit Opportunity Act (ECOA) guarantees nondiscrimination in the granting of credit by protecting classes of persons similar to the Federal Fair Housing Act. It prohibits discrimination based on race, color, religion, national origin, sex, marital status, or age in the granting of credit. Marital status and age are classes that are unique to ECOA. It also prevents lenders from discriminating against recipients of public assistance programs such as food stamps and Social Security. As in the Federal Fair Housing Act, the ECOA requires that credit applications be considered only on the basis of income, net worth, job stability, and credit rating. More information about the ECOA is available at the Federal Trade Commission's website. Unlike the federal Fair Housing Act, marital status is a protected class under the Equal Credit Opportunity Act.

Answer 706

One way that many organizations address ethics among their members or in their respective businesses is by adopting codes of professional conduct. A code of ethics is a written system of standards for ethical conduct. The code contains statements designed to advise, guide, and regulate job behavior. To be effective, a code of ethics must be specific by dictating rules that either prohibit or demand certain behavior. Lofty statements of positive goals are not especially helpful. By including sanctions for violators, a code of ethics becomes more effective. The National Association of REALTORS® (NAR), the largest trade association in the country, adopted a Code of Ethics for its members in 1913. REALTORS® are expected to subscribe to this strict code of conduct. NAR has established procedures for professional standards committees at the local, state, and national levels of the organization to administer compliance. Interpretations of the code are known as Standards of Practice. Since the early 2000s, NAR required its members to take an ethics refresher course every four years but is instituting a biennial requirement beginning in 2017. The NAR Code of Ethics has proved helpful because it contains practical applications of business ethics. Many other professional organizations in the real estate industry have codes of ethics as well. In addition, many state real estate regulatory commissions are required by law to establish codes or canons of ethical behavior for their states' brokers. The articles in the NAR Code of Ethics frequently provide guidelines to practice that underscore state and federal laws. On occasion, the Code goes beyond those laws and encourages its members to go beyond the minimum in terms of acceptable behavior. For example, Article 10 of the Code states, "REALTORS® shall not deny equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. REALTORS® shall not be parties to any plan or agreement to discriminate against a person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity." Note that in addition to the seven protected classes described by the Federal Fair Housing Act, REALTORS® must also avoid discriminatory practices based on sexual orientation or gender identity. While not all real estate licensees are REALTORS® and thus are not obligated to follow the NAR Code, the Code is frequently cited in litigation as the standard of practice for the industry. Not every broker is a member of NAR although every REALTOR® is a broker. Only the members of that organization are subject to its code of conduct. However, courts often review the NAR Code of Ethics to consider how ethical conduct is characterized by this trade group.

Answer 707

guaranteed equal housing opportunities to all U.S. citizens, was upheld in Jones v. Mayer, 1968, and prohibits all racial discrimination with no exceptions. Also, complaints under the Civil Rights Act of 1866 go directly to federal court. Race was defined by the U.S. Supreme Court to include ancestral and ethnic characteristics, including certain physical, cultural, or linguistic traits that are shared by a group with a common national origin.

Answer 708

prohibits discrimination in housing based on race, color, religion, or national origin; does not prohibit discrimination based solely on a person's citizenship status; and prohibits illegal activities that include steering, blockbusting, and redlining.

Answer 709

The Housing and Community Development Act of 1974 added sex to list of protected classes.

Answer 710

Asbestos is a mineral that was once used in building supplies because of its fire-retardant and sound insulation qualities. It was a component of more than 3,000 types of building materials, including appliances, ceiling and floor tiles, exterior siding, and roofing. The Environmental Protection Agency (EPA) estimates that about 20% of the nation's commercial and public buildings contain asbestos. A number of asbestos products, including asbestos insulation, were banned in 1978. Today, we know that inhaling microscopic asbestos fibers may result in a variety of respiratory diseases as well as lung and stomach cancer. The mere presence of asbestos insulation is not necessarily a health hazard if the asbestos-laden item is intact. Asbestos is harmful only if it is disturbed or exposed, as often occurs during renovation or remodeling. Asbestos is highly friable; that is, as it ages, asbestos fibers break down easily into tiny filaments and particles. When these particles become airborne, they pose a health risk to humans. Airborne asbestos contamination is most prevalent in public and commercial buildings, including schools. If the asbestos fibers in the indoor air of a building reach a dangerous level, the building becomes almost impossible to lease, finance, or insure since no safe level of asbestos exposure has been determined. Asbestos contamination also can be found in residential properties. Asbestos was used to cover pipes, ducts, plus heating and hot water units. Its fire-resistant properties made it a popular material for use in floor tile, exterior siding, and roofing products. Though it may be easy to identify asbestos when it is visible (for instance, when it is wrapped around heating units and water pipes), identification may be more difficult when it is behind walls or under floors. Asbestos is costly to remove because the process requires state-licensed asbestos abatement contractors and specially sealed environments. In addition, removal itself may be dangerous: improper removal procedures may further contaminate the air within the structure. The waste generated should be disposed of at a licensed facility, which further adds to the expense of removal. Encapsulation, or the sealing off of disintegrating asbestos, is an alternate method of asbestos control that may be preferable to removal in certain circumstances. However, an owner must periodically monitor the condition of the encapsulated asbestos to make sure it is not disintegrating. Tests can be conducted to determine the level of airborne asbestos to provide an accurate disclosure in a sales transaction. An engineer skilled in identifying the presence of materials that contain asbestos can perform a thorough analysis of a building. An asbestos report is now required in North Carolina before a permit will be issued for the reconstruction, renovation, or demolition of any residential or commercial structure. Either of these approaches can satisfy the concerns of a consumer. Appraisers also should be aware of the possible presence of asbestos. More information on asbestos-related issues is available from the EPA. In addition, the EPA has numerous publications that provide guidance, information, and assistance with asbestos issues.

Answer 711

Lead was used as a pigment and drying agent in alkyd oil-based paint prior to 1978. Lead-based paint may be on any interior or exterior surface, but it is particularly common on doors, windows, and other woodwork. The federal government estimates that lead is present in about 75% of all private housing built before 1978; that involves approximately 57 million homes, ranging from low-income apartments to million-dollar mansions. An elevated level of lead in the human body causes lead poisoning that can lead to serious damage to the brain, kidneys, nervous system, and red blood cells. The degree of harm is related to the amount of exposure and the age at which a person is exposed. Children are most at risk, and it is estimated that as many as one in every six children may have dangerously high amounts of lead in the blood that may first manifest as learning disabilities. Lead dust can be ingested from the hands by a crawling infant, inhaled by any occupant of a structure, or ingested from the water supply because of lead pipes or lead solder. In fact, lead particles can be present elsewhere, too. Soil and groundwater may be contaminated by everything from lead plumbing in leaking landfills to discarded skeet and bullets from an old shooting range. High levels of lead have been found in the soil near waste-to-energy incinerators. The residential use of lead-based paint was banned in 1978. Brokers who are involved in the sale, management, financing, or appraisal of properties constructed before 1978 face potential liability for any personal injury that might be suffered by an occupant. Numerous legislative efforts affect brokers, sellers, and landlords. There is considerable controversy about practical approaches for handling the presence of lead-based paint. Some suggest that it should be removed; others argue that it should be encapsulated; still others advocate testing to determine the amount of lead present, which then would be disclosed to a prospective owner or resident. In many states, only licensed lead inspectors, abatement contractors, risk assessors, abatement project designers, and abatement workers may deal with the removal or encapsulation of lead in a structure. No federal law requires that homeowners test for the presence of lead-based paint. However, known lead-based paint hazards must be disclosed. In 1996, the EPA and the Department of Housing and Urban Development (HUD) issued final regulations requiring disclosure of the presence of any known lead-based paint hazards to potential buyers or renters. Under the Residential Lead-Based Paint Hazard Reduction Act, persons selling or leasing residential housing constructed before 1978 must disclose the presence of known lead-based paint and provide purchasers or lessees with any relevant records or reports. A lead-based paint disclosure statement must be attached to all sales contracts and leases regarding residential properties built before 1978, and a lead hazard informational pamphlet must be distributed to prospective buyers and tenants. For purposes of this disclosure, the EPA has defined target housing as any housing constructed prior to 1978, except housing for the elderly or persons with disabilities (unless any child who is less than 6 years of age resides or is expected to reside in such housing) or any zero-bedroom dwelling. Purchasers and tenants must be given 10 days in which to conduct risk assessments or inspections for lead-based paint or lead-based paint hazards. Purchasers are not bound by any real estate contract until the 10-day period has expired. A tenant's right to rescind a lease under this Act terminate when the tenant begins occupancy of the rental unit. The regulations specifically require that real estate brokers ensure that all parties comply with the law. The purpose of the rule is to ensure that buyers and renters of housing built prior to 1978 receive proper disclosures. The North Carolina law, the Lead-Based Paint Poisoning Act of 1971 (NCGS §130A-131.5), is a statute that targets the elimination of lead-based paint in houses connected with HUD-assisted projects. Note that lead poisoning may also result from plumbing systems that contain lead pipes. Systems that use lead pipes should be tested frequently. EPA guidance pamphlets and other information about lead-based hazards are available from the National Lead Information Center, 800-424-5323, or online. Beginning April 2010, federal law requires anyone who is paid to perform work that disturbs paint in housing and child-occupied facilities to be trained and certified in the EPA's new lead-based work practices. This includes residential rental property owners/managers, general contractors, and special trade contractors (e.g., painters, plumbers, carpenters, electricians). Do-it-yourself property owners are exempted. The Renovation, Repair, and Painting (RR&P) program involves pre-renovation education. This education includes distribution of the pamphlet "Renovate Right" to the property owners before work commences. Under the North Carolina Lead-Based Paint Hazard Management Program, inspectors and firms/individuals who perform renovation, repair, and painting projects for compensation in homes and daycare facilities built before 1978 must be certified. Fines for violating this program can be $750 per day. Owner-occupied do-it-yourself renovations are not required to be done by certified firms or certified renovators. (For more information, go to https://epi.publichealth.nc.gov/lead/pdf/RRPCommonQuestions033015.pdf and here.) Sellers, lessors, and renovators are required to disclose any prior test results or any knowledge of lead-based paint hazards. With only a very narrow exception, all real estate licensees (subagent, buyer's agent, dual agent) are required to advise sellers to make the required disclosures. Only buyer's agents who are paid entirely by the buyer are exempt. The North Carolina Real Estate Commission has advised that if a broker knows for a fact that renovations were completed in violation of the new EPA rule after April 2010, this will be a material fact which must be disclosed. Fines for violations can be up to $32,500 per day under EPA sanctions. The North Carolina REALTORS® offers an addendum that can be used to make the appropriate disclosures regarding the possible presence of lead-based paint.

Answer 712

Radon is a radioactive gas produced as a by-product of the natural decay of other radioactive substances. Although radon can occur anywhere, some areas are known to have abnormally high amounts. Radon is found in every state, with the highest concentrations in the plains states, the upper Midwest, and northeastern United States (see Radon Concentration in the United States). Radon has been found in every county in North Carolina, with the heaviest concentration in the mountainous areas of the state. If radon dissipates into the atmosphere, it is not likely to cause harm. However, when radon enters buildings and is trapped in high concentrations (usually in basements with inadequate ventilation), it can cause health problems. Because radon is clear, odorless and tasteless, it is impossible to detect without testing. Care should be exercised in the manner in which tests are conducted to ensure that the results are accurate. Radon levels vary, depending on the amount of fresh air that circulates through a house, the weather conditions, and the time of year. It is relatively easy to reduce levels of radon by installing a mitigation system using ventilation systems or exhaust fans. The presence of radon over the EPA's recommended level of 4.0 picocuries is a material fact that must be disclosed. Radon mitigation systems have become more common and are often being installed in new construction homes with no history of radon gas. Such systems are often included as part of a green building program or as a feature in new homes since installation at the time of construction is much less expensive than installing an after-market system. Home radon-detection kits are available; although radon-detection professionals can conduct more accurate testing. It is estimated that about one-third of all radon testing is done in connection with a real estate transaction. The EPA's pamphlet A Citizen's Guide to Radon is available from your local EPA office or on the EPA website. North Carolina also has a radon-specific website,

Answer 713

Urea-formaldehyde (UFFI) was first used in building materials, particularly insulation, in the 1970s. Gases leak out of the urea-formaldehyde foam insulation (UFFI), as it hardens, and they become trapped in the interior of a building. In 1982, the Consumer Product Safety Commission originally banned the use of UFFI, but the ban was reduced to a warning after courts determined that there was insufficient evidence to support a ban. Urea-formaldehyde is known to cause cancer in animals, though the evidence of its effect on humans is inconclusive. Formaldehyde can also be found in pressed-wood products, such as, for example, particle board, plywood paneling, and fiberboard. Formaldehyde does cause some individuals to suffer respiratory problems or asthma attacks as well as eye and skin irritations. Consumers are becoming increasingly wary of the presence of formaldehyde, particularly if they are sensitive to it. Tests can be conducted to determine the level of formaldehyde gas in a house. Again, however, care should be exercised to ensure that the results of the tests are accurate and that the source of the gases is properly identified. Elevated levels could be due to a source other than the insulation such as glues or bonding agents found in furniture or other home furnishings. Brokers should be careful that any conditions in an agreement of sale that require tests for formaldehyde are worded properly to identify the purpose for which the tests are being conducted, such as to determine the presence of the insulation or some other source. Appraisers should also be aware of the presence of UFFI. Remediation of formaldehyde gas can be aided by increasing ventilation.

Answer 714

Carbon monoxide (CO) is a colorless, odorless gas that occurs as a by-product of burning such fuels as wood, oil, and natural gas if combustion is incomplete. Furnaces, water heaters, space heaters, fireplaces, and wood stoves all produce CO as a natural result of their combustion of fuel. When these appliances function properly and are properly ventilated, their CO emissions are not a problem. When improper ventilation or equipment malfunctions permit large quantities of CO to be released into a residence or commercial structure, it poses a significant health hazard. Its effects are compounded by the fact that CO is so difficult to detect. Carbon monoxide is quickly absorbed by the human body where it inhibits the blood's ability to transport oxygen, resulting in dizziness and nausea. As the concentrations of CO increase, the symptoms become more severe. More than 200 deaths from CO poisoning occur each year. Carbon monoxide detectors are available, and their use is mandatory in some areas. Annual maintenance of heating systems also helps avoid CO exposure. Buyers should have an inspection of the HVAC system that includes CO monitoring prior to purchase.

Answer 715

Electromagnetic fields (EMFs) are generated by the movement of electrical currents. The use of any electrical appliance creates a small field of electromagnetic radiation: clock radios, blow dryers, televisions, and computers all produce EMFs. The major concern regarding electromagnetic fields involves high-tension power lines. The EMFs produced by these high-voltage lines, as well as by secondary distribution lines and transformers, are suspected of causing cancer, hormonal changes, and behavioral abnormalities. There is considerable controversy (and much conflicting evidence) about whether EMFs pose a health hazard. In a May 1999 report to the U.S. Congress, the National Institute of Environmental Health Science reported that there is no evidence of a correlation between EMFs and adverse health effects. Buyers who are aware of the controversy may, however, be unwilling to purchase property near power lines or transformers. As research into EMFs continues, real estate brokers should stay informed about current findings.

Answer 716

Groundwater is the water that exists under the earth's surface within the tiny spaces or crevices in geological formations. Groundwater forms the water table, the natural level at which the ground is saturated. This may be near the surface in areas where the water table is very high or several hundred feet underground. Surface water also can be absorbed into the groundwater. Any contamination of the underground water can threaten the supply of pure, clean water for private wells or public water systems. If groundwater is not protected from contamination, the earth's natural filtering systems may be inadequate to ensure the availability of pure water. Numerous state and federal laws have been enacted to preserve and protect the water supply including the amended Safe Drinking Water Act of 1974. Water can be contaminated from a number of sources. Runoff from waste disposal sites, leaking underground storage tanks, improperly discarded commercial byproducts, and pesticides and herbicides are some of the main culprits. Because water flows quickly from one place to another, contamination can spread far from its source. As an example of the far reaching effects of leakage, it is estimated that one gallon of gasoline can contaminate one million gallons of drinking water. Once contamination has been identified, its source can be eliminated and the water may eventually become clean. However, the process can be time consuming and extremely expensive.

Answer 717

Approximately 3 million to 5 million underground storage tanks (USTs) exist in the United States. According to the EPA, an underground storage tank system is a tank and any underground piping connected to the tank that has at least 10% of its combined volume underground. As of the end of the EPA September 2008 reporting period, almost a half million of those USTs have experienced confirmed leaks. The increase in reports of leaks can be partially attributed to the fact that until the mid-1980s, most USTs were made of bare steel, which will corrode over time. Underground storage tanks are commonly found on sites where petroleum products are used or where gas stations and auto repair shops are located. They also may be found in a number of other commercial and industrial establishments—including printing and chemical plants, wood treatment plants, paper mills, paint manufacturers, dry cleaners, and food processing plants—for storing chemical or other process waste. Military bases and airports also are common sites for underground tanks. Many, if not most, of the residential UST tanks that were used to store heating oil have been abandoned when newer heating systems were installed. Some tanks are currently in use, but many are long forgotten. It is an unfortunate fact that it was once common to dispose of toxic wastes by simple burial: out of sight, out of mind. Over time, however, neglected tanks may leak hazardous substances into the environment. This permits contaminants to pollute not only the soil around the tank but also adjacent parcels and groundwater. Brokers should be particularly alert to the presence of fill pipes, vent lines, stained soil, oil sheens in wet areas, and fumes or odors, any of which may indicate the presence of a UST. Detection, removal, and cleanup of surrounding contaminated soil can be an expensive operation. State and federal laws impose very strict requirements on landowners on which underground storage tanks are located to detect and correct leaks in an effort to protect the groundwater. The EPA under the Resource Conservation and Recovery Act of CERCLA created the Office of Underground Storage Tanks in 1985 to regulate the federal UST program. The federal UST regulations apply to only underground tanks and piping storing either petroleum or certain hazardous substances. Commercial UST owners are required to register their tanks and adhere to strict technical and administrative requirements that govern installation, maintenance, corrosion prevention, overspill prevention, monitoring, and recordkeeping. Owners also are required to demonstrate that they have sufficient financial resources to cover any damage that might result from leaks. The following types of tanks are among those that are exempt from federal regulations: Tanks that hold less than 110 gallons Farm and residential tanks that hold 1,100 gallons or less of motor fuel used for noncommercial purposes Tanks that store heating oil burned on the premises Tanks on or above the floor of underground areas, such as basements or tunnels Septic tanks and systems for collecting stormwater and wastewater North Carolina, like many states, has adopted laws regulating underground storage tanks that are sometimes more stringent than the federal laws. North Carolina has maintained an EPA-approved UST program since 1999 under the North Carolina Department of Environment and Natural Resources (DENR). Brokers who know of current or former USTs on a property are required to disclose to all prospective purchasers or tenants. Buyers agents should encourage buyers to get USTs inspected and conduct soil tests. In addition to being aware of possible noncompliance with state and federal regulations, the parties to a real estate transaction should be aware that many older tanks have never been registered or fall into the exempt category. There may be no visible sign of their presence. If a leaking UST cannot be removed and the contamination totally remediated, the leak will become a cloud on the title of the property.

Answer 718

Americans produce vast quantities of garbage every day. Despite public and private recycling and composting efforts, huge piles of waste materials—from beer cans, junk mail, and diapers to food, paint, and toxic chemicals—require disposal. Landfill operations have become the main receptacles for garbage and refuse. Special hazardous-waste disposal sites have been established to contain radioactive waste from nuclear power plants, toxic chemicals, and waste materials produced by medical, scientific, and industrial processes. Perhaps the most prevalent method of common waste disposal is simply to bury it. A landfill is an enormous hole, either excavated for the purpose of waste disposal or left over from surface mining operations. The hole is lined with clay or a synthetic liner to prevent leakage of waste material into the water supply. A system of underground drainage pipes permits monitoring of leaks and leaching. Waste is laid on the liner at the bottom of the excavation, and a layer of topsoil is then compacted onto the waste. The layering procedure is repeated again and again until the landfill is full, the layers mounded up sometimes as high as several hundred feet over the surrounding landscape. Capping is the process of laying two to four feet of soil over the top of the site and then planting grass or some other vegetation to enhance the landfill's aesthetic value and to prevent erosion. A ventilation pipe runs from the landfill's base through the cap to vent off accumulated natural gases created by the decomposing waste. Federal, state, and local regulations govern the location, construction, content, and maintenance of landfill sites. Test wells around landfill operations are installed to constantly monitor the groundwater in the surrounding area, and soil analyses can be used to test for contamination. Completed landfills have been used for such purposes as parks and golf courses. Rapid suburban growth has resulted in many housing developments and office campuses being built on landfill sites. However, buildings constructed on landfills may have problems caused by settling.

Answer 719

Mold is the latest environmental issue of concern in the last decade due in large part to massive exposure in the media to extraordinary situations of excessive amounts of toxic mold in some homes around the country. Perhaps the major real estate industry issue related to mold is how the surge in insurance claims has affected the insurability of properties with previous water claims. Mold can be found almost anywhere and can grow on almost any organic substance, so long as moisture, oxygen, and an organic food source are present. Moisture feeds mold growth. If a moisture problem is not discovered or addressed, mold growth can gradually destroy the surface on which it grows. In addition, some molds can cause serious health problems. They can trigger allergic reactions and asthma attacks. Some molds are known to produce potent toxins and/or irritants. Some moisture problems in homes and buildings have been directly linked to recent changes in construction practices. Some of these practices have resulted in buildings that are too tightly sealed, preventing adequate ventilation. Building materials, such as drywall, may not allow moisture to escape easily. The material used in drywall wicks moisture to the nutrition source of glue and paper. Vinyl wallpaper and exterior insulation finish systems (EIFS), also known as synthetic stucco, also do not allow moisture to escape. Other moisture problems include roof leaks, unvented combustion appliances, and landscaping or gutters that direct water to the building. In general, mold remediation involves identifying and resolving the cause of water damage such as leaking pipes or poor landscaping, cleaning the mold off of surfaces or replacing damaged materials such as carpet or other absorbent items.The EPA has published guidelines for the remediation and/or cleanup of mold and moisture problems in schools and commercial buildings. Mold is an important issue for brokers. Initially, lawsuits were brought against construction and insurance companies until the insurance companies started amending their homeowners insurance policies to exclude mold from coverage. Now, plaintiffs name sellers, landlords, property management companies, and real estate brokers as defendants, in addition to construction and insurance companies. In light of this case and other court decisions on this topic, real estate companies and brokers will find it difficult to know what to do when mold is suspected or found on a property. There are no federal requirements to disclose mold contamination at this time, and only a few states require disclosure. The mere presence of mold in a residence is not a material fact according to NCREC unless there is an excessive amount of mold in unusual locations—generally, more than one square foot of mold. Numerous websites can be visited to garner information about mold and its treatment. Brokers should remind buyers that sellers cannot disclose what they do not know. Also, brokers should advise buyers that they have not only the right but also the burden to discover. Brokers may need to take extra steps to protect themselves from liability. Brokers who suspect that mold is present in a home should ask many questions about leaks, floods, and prior damage and remind the sellers to honestly and truthfully disclose any insurance claims regarding mold and other water issues.

Answer 720

The majority of legislation dealing with environmental problems has been instituted within the past two decades. Although the EPA was created at the federal level to oversee such problems, several other federal agencies' areas of concern generally overlap. The federal laws were created to encourage state and local governments to enact their own legislation.

Answer 721

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) was created in 1980. It established a fund of $9 billion, called the Superfund, to clean up uncontrolled hazardous waste sites and to respond to spills. It created a process for identifying potentially responsible parties (PRPs) and ordered them to take responsibility for the cleanup action. CERCLA is administered and enforced by the EPA.

Answer 722

A landowner is liable under CERCLA when a release or a threat of release of a hazardous substance has occurred on the landowner's property. Regardless of whether the contamination is the result of the landowner's actions or those of others, the owner can be held responsible for the cleanup. This liability includes the cleanup not only of the landowner's property but also of any neighboring property that has been contaminated. A landowner who is not responsible for the contamination can seek reimbursement for the cleanup cost from previous landowners, any other responsible party, or the Superfund. However, if other parties are not available, even a landowner who did not cause the problem could be solely responsible for the cleanup costs. Once the EPA determines that hazardous material has been released into the environment, it is authorized to begin remedial action. First, it attempts to identify the PRPs. If the PRPs agree to cooperate in the cleanup, they must agree about how to divide the cost. If the PRPs do not voluntarily undertake the cleanup, the EPA may hire its own contractors to do the necessary work. The EPA then bills the PRPs for the cost. If the PRPs refuse to pay, the EPA can seek damages in court for up to three times the actual cost of the cleanup. Liability under the Superfund is considered to be strict, joint and several, and retroactive. Strict liability means that the owner is responsible to the injured party without excuse. Joint and several liability means that each of the individual owners is personally responsible for the total damages. If only one of the owners is financially able to handle the total damages, that owner must pay the total and collect the proportionate shares from the other owners whenever possible. Retroactive liability means that the liability is not limited to the current owner but includes people who have owned the site in the past.

Answer 723

In 1986, the U.S. Congress reauthorized the Superfund. The amended statute contains stronger cleanup standards for contaminated sites and five times the funding of the original Superfund, which expired in September 1985. The amended Act also sought to clarify the obligations of lenders. As mentioned, liability under the Superfund extends to both the present and all previous owners of the contaminated site. Real estate lenders found themselves either as present owners or somewhere in the chain of ownership through foreclosure proceedings. The amendments created a concept called innocent landowner immunity. It was recognized that in certain cases, a landowner in the chain of ownership was completely innocent of all wrongdoing and therefore should not be held liable. The innocent landowner immunity clause established the criteria by which to judge whether a person or business could be exempted from liability. The criteria included the following: The pollution was caused by a third party. The property was acquired after the fact. The landowner had no knowledge of the damage. Due care was exercised when the property was purchased (the landowner made a reasonable search, called an environmental site assessment) to determine that no damage to the property existed. Reasonable precautions were taken in the exercise of ownership rights.

Answer 724

The purpose of the North Carolina Leaking Petroleum Underground Storage Tank Cleanup Act (NCGS §143-215.94A) is to regulate underground storage tanks' discharge of any hazardous substance, including gas and oil. Because current owners may be liable for cleanup even if a leak was caused by a previous owner, owners of properties with tanks that may be leaking face the heavy financial burden of cleanup costs, even though they themselves did not install the tanks or cause the leak. This Act covers both residential and commercial properties. Any broker who knows of any current or previous underground storage tank (UST) on the property must disclose to all prospective purchasers or tenants. Also, buyer agents should strongly encourage buyers to hire an expert to inspect the tank(s) and conduct soil contamination tests to determine what, if any, major hazards the buyer have liability for.

Answer 725

The North Carolina Coastal Area Management Act (CAMA) (NCGS §113A-100) is designed to protect, preserve, and give management guidelines in coastal areas of the state. It places a severe limitation on developments in the coastal estuarine system. A majority of coastal areas in North Carolina, such as wetlands and marshes, have been declared areas of environmental concern. Any proposed development or changes in these areas, such as building, dredging, filling or digging, clearing or bulkheading, must first be approved through a permit process. Property owners in violation of CAMA will face serious legal problems including the probability of a court order mandating that they finance the repair of any damage done to the estuarine system. Brokers practicing in the eastern third of the state should consider CAMA compliance a material fact in transactions that might involve land development.

Answer 726

The Mountain Ridge Protection Act (NCGS §113A-208) was the first comprehensive law in the nation passed by a state to regulate construction on protected mountain ridges. The construction of a 10-story condominium project on Little Sugar Mountain in Avery County sparked public outrage locally at what was perceived as a blight upon the scenic views of the Blue Ridge Mountains. The Act allows a municipality to adopt and enforce "…any ordinance that regulates the construction of tall buildings or structures on protected mountain ridges…"

Answer 727

Under the North Carolina Dredge and Fill Act (NCGS §113-229), a property owner must obtain a permit from the Coastal Resources Commission before participating in any dredging or filling that may affect vegetation or aquatic conditions in North Carolina waters or marshlands. This Act is part of compliance with the federal Clean Water Acts that protect wetlands and other waters of the United States. The federal government defines wetlands as areas periodically inundated or saturated to the extent that they can or do support vegetation adapted to aquatic conditions.

Answer 728

The North Carolina Sediment Pollution Control Act (NCGS §113A-50) was enacted to handle problems that occur as a result of sedimentation in state waters. Sedimentation may have natural causes, such as erosion, or human-made causes that result in a deposit of soil or other materials into water. Such deposits may have an adverse effect on the aquatic life in the area. Any type of development, construction, or any other activity that may disturb vegetation or topography in a way that may cause sedimentation is illegal and subject to the Act. The Act calls for erosion control devices, the development of sedimentation plans, and the creation of natural buffer zones. The law is enforced by the North Carolina Department of Environment, Natural Resources.

Answer 729

The proper execution and delivery to the closing attorney of all documents necessary to complete the transaction contemplated by this Contract, including the deed, settlement statement, deed of trust and other loan or conveyance documents, and the closing attorney's receipt of all funds necessary to complete such transaction.

Answer 730

The completion of the legal process which results in the transfer of title to the Property from Seller to Buyer, which includes the following steps: (1) the Settlement (defined above); (2) the completion of a satisfactory title update to the Property following the Settlement; (3) the closing attorney's receipt of authorization to disburse all necessary funds; and (4) recordation in the appropriate county registry of the deed(s) and deed(s) of trust, if any, which shall take place as soon as reasonably possible for the closing attorney after Settlement. Upon Closing, the proceeds of sale shall be disbursed by the closing attorney in accordance with the settlement statement and the provisions of Chapter 45A of the North Carolina General Statutes. If the title update should reveal unexpected liens, encumbrances or other title defects, or if the closing attorney is not authorized to disburse all necessary funds, then the Closing shall be suspended and the Settlement deemed delayed under Paragraph 13 (Delay in Settlement/Closing). Simply put, settlement involves the time when the buyers and sellers review and sign the necessary closing paperwork, but the transfer of the title does not take place until later—sometimes just hours later, but it could be days later since closing involves recordation in North Carolina. Brokers who use the NCBA/NCAR 2-T OPC should also point out to buyers and sellers that the North Carolina contract states that buyers will not get possession of the property until closing and that sellers will not get their funds until that time as well:

Answer 731

Possession, including all means of access to the Property (keys, codes, garage door openers, etc.), shall be delivered upon Closing….

Answer 732

1) the promises made in the sales contract are fulfilled, (2) the mortgage loan funds (if any) are distributed to the buyer for use, and (3) other settlement costs or funds are disbursed. It is the time when the title to the real estate is transferred via the deed in exchange for payment of the purchase price.

Answer 733

Understanding the due diligence process is one of the most important aspects of the 2-T Offer to Purchase and Contract, not only for the buyer but also for the seller. It is a time period in the contract that both parties agree to. During this time period, the buyer should be having inspections performed and negotiated, as well as the having the appraisal performed, property insurance initiated, and the property survey ordered. Anything can be negotiated during the due diligence period. Any negotiated repairs do not have to be completed prior to the end of the due diligence period, only prior to settlement. Things to check for during the inspection period could be permits for recent construction, restrictive covenants, homeowner association documents, and verification of streets if public or private. In addition to various inspections, the broker working with a buyer is expected to recognize "red flag" situations and to assist the buyer in checking into these situations by performing an early walkthrough of the property to identify any potential problems. If there is an onsite septic system, the buyer should obtain a copy of the septic permit from the county health department, if possible. The broker cannot advertise more bedrooms than allowed by the septic permit regardless of how many rooms are designed as bedrooms. Both the buyer and buyer's agent should allow enough time for the due diligence process to be completed and the decision to be made on whether to continue the contract or to terminate. The date listed for the expiration of due diligence is a firm date. The period expires at 5:00 PM on that day, unless both parties agree to extend the date using Form 4-T Agreement to Amend Contract. Should the buyer decide to terminate the contract prior to the expiration of the due diligence period, the buyer may obtain any earnest money deposited, but not any due diligence Fee. If the buyer chooses to go forward with the contract, the due diligence fee and any earnest money would be credited back to the buyer at closing. It is very important for the buyer to understand the potential loss of any money that is dependent on a firm contract date. In addition to the inspections, appraisal, insurance, and survey, the buyer should also be working to secure financing, because the inability to do so after the due diligence period is over would result in the buyer's breach of contract. It is extremely important for the buyer and seller to have appropriate insurance coverage in situations when the closing is delayed, the buyer will occupy the property before closing, or the seller continues to occupy the property after closing. Failure to have adequate insurance, including flood insurance, if needed, could result in no coverage for fire or natural disaster. If the home is in a FEMA special flood hazard zone, the flood elevation certificate and flood insurance are usually required by the lender. The buyer's Due Diligence Period (DDP) in the NCBA/NCAR 2-T Offer to Purchase and Contract is "…the Buyer's opportunity . . . to investigate the Property and the transaction contemplated by this Contract… to decide whether Buyer, in Buyer's sole discretion, will proceed with or terminate the transaction." There are no restrictions on what or how the buyer investigates the property under contract. The buyer is urged to hire appropriate experts to examine the property's condition and whether it will serve the buyer's need. The rather extensive list of suggestions for investigation issues in the NCBA/NCAR 2-T OPC should answer most standard questions and concerns that a buyer might have about purchasing a property

Answer 734

While other contract forms may permit buyers to back out of a contract if they fail to obtain financing, there is no separate loan financing condition in the NCBA/NCAR 2-T OPC. In other words, once the buyers have committed to purchasing the property by not terminating during the Due Diligence Period (DDP), they cannot legally terminate the contract for failure to obtain a loan commitment. Buyers are strongly advised to structure their DDP to allow time to assure that their lender will approve the requested financing. If the buyers are not comfortable that the loan will be approved, they should exercise the right to terminate the contract before the expiration of the due diligence period. If the financing request is denied after the DDP has expired, the buyer will be in breach of the contract if the buyer cannot close. This is an excellent reason why buyers should begin the loan process before or at the beginning of the property search.

Answer 735

The buyer is given encouragement to conduct any desired inspection including some very standard items. A thorough inspection of all improvements on the property, ideally by experts, is a practice that should not be waived. Home inspectors can identify needed repairs and items of concern that might require more specialized scrutiny. Structural engineers, pest-infestation experts, environmental hazard specialists, and HVAC-licensed professionals are just a few of the advisors a buyer might use. If the property is subject to subdivision protective covenants, a thorough review of what can and cannot be done on or to the property is critical to determine if the buyer is willing to proceed with the purchase. A title search should also be conducted by the closing attorney to assure that the seller's title is marketable and insurable as promised. Current or proposed zoning regulations could affect the intended use of the property by the buyer.

Answer 736

The availability and affordability of homeowners insurance on the property needs to be verified during the due diligence period. Sellers should be informed that they should not cancel their coverage until closing, and buyers should be similarly informed to contact their insurer about the start of coverage. A flood elevation certificate and flood insurance is usually required by the lender if any part of the financed property is in a FEMA special flood hazard zone.

Answer 737

If the buyer is applying for a mortgage loan to purchase the property, the lender will order an appraisal to help evaluate the market value of the collateral property. Due to intensive audits caused by extensive mortgage fraud in recent years, appraisers tend to be very conservative in their appraisal values that can prompt an appraisal value below contract price. Consequently, a buyer is strongly advised to obtain the appraisal prior to the end of the DDP.

Answer 738

Any title defects discovered by a survey would survive the DDP because the seller is tasked with providing clear marketable title free of encumbrances. The survey is known for verifying property lines and possible encroachments, but it also identifies easements and setbacks that might impact the buyer's intended use for the property. For this reason, the survey should be obtained in the DDP also. While few lenders require that buyer-borrowers obtain a survey, buyers should be advised that the failure to do so may cause problems in the short- and long-term future. For example, they may discover after closing that they cannot extend their deck as they wished because of setback requirements or boundary lines. More importantly, the buyers' title insurance policy may not cover for future claims that involve easements, encroachments, and other boundary issues if a survey was not obtained.

Answer 739

If property is unimproved and does not have access to a central sewage disposal system, the buyer should order a soil suitability test, sometimes called a percolation test (or perc test). This test measures the soil's ability to absorb and drain water. Soil must percolate properly before approval will be given to install a septic system for on-site sewage disposal.

Answer 740

Many homes in North Carolina are made of wood, and accordingly, buyers should be encouraged to obtain a wood-destroying insect report. According to the North Carolina Department of Agriculture and Consumer Services (NCDA&CS), this inspection is the "…careful visual examination of all accessible areas of a building and the sounding of accessible structural members to determine the presence of evidence of wood-destroying insect infestation. Infestation includes both present and past activity of wood-destroying insects visible in, on, or under a structure, or in or on debris under the structure. Permanently attached decks, porches, storage sheds, etc. are included in these inspections. Outbuildings or other detached structures are not routinely inspected unless specifically requested by the client." The official North Carolina Wood-Destroying Insect Information Report (Form No. WDIR 100), is used for reporting the presence or absence of wood-destroying insects in structures for sale (see North Carolina Wood Destroying Insect Information Report). A person must be licensed by the NCDA&CS' Structural Pest Control Division to issue this report. It is the only form which is legal for this purpose. It is important for individuals to understand the limitations of this form. The WDIR is issued for informational purposes and is required to reveal information concerning wood-destroying insects only. The pest control operator must report all visible evidence of wood-destroying insects and any conditions conducive to subterranean termites. The WDIR is not a warranty as to the absence of wood-destroying organisms; it is a report of the apparent presence or absence of wood-destroying insects at the time of the inspection. The NCDA&Cs warns that though sometimes referred to as such, the WDIR is not a "clearance letter," in that it does not necessarily clear a structure, and it is not a "termite letter," in that it addresses more than just termites. Insects commonly noted on the WDIR include subterranean termites, powder post beetles, old house borers, carpenter ants and sometimes carpenter bees. Other, less common insects may also be reported. "Conditions conducive to subterranean termites" must also be reported.

Answer 741

Although there are no mandatory repairs required by the NCBA/NCAR 2-T OPC, the buyer and seller can negotiate anything during the DDP. The actual repairs/improvements do not need to be completed prior to the expiration of the DDP, but the negotiations need to be ratified during the DDP or the buyer may purchase the property in its current condition. Mandated building permits should be obtained for any addition or major repair. It is also advisable that buyers determine that no requested repairs or improvements are in violation of zoning regulations or restrictive covenants. The same applies to recent property renovations by the sellers to make the property more marketable. A legal professional can also determine if any contractor or mechanics liens may have been filed against the property for recent work. The Due Diligence Request and Agreement Form (310-T) is a North Carolina REALTORS® form which articulates any repair agreement as part of the contract. This agreement could be used to provide details about the possibility of needed permits as well as the need for licensed professionals to do any negotiated repairs and/or improvements.

Answer 742

If the buyer is not satisfied with the property condition, terms of the contract, the loan application, repair negotiations, or anything else, the buyer may terminate the contract in writing to the seller or seller's agent by 5:00 pm on the date stated in the DDP clause. The deadline is characterized as time is of the essence, and thus, the buyer must act by this time or risk the loss of any earnest monies.

Answer 743

After contract formation, the buyers and/or their representatives will need access to the property for initial and subsequent inspection of the property. The buyers are strongly advised to conduct a final walk-through inspection to verify completion of all negotiated repairs plus ascertain that no fixtures were removed prior to settlement and all debris and seller personal property were removed. If tenants reside on the property, they should have been informed of a change in ownership and how that change may affect their rights to remain.

Answer 744

Obviously, the seller's main interest is receiving payment for the property. The seller needs to be sure that the buyer has obtained the necessary financing and has sufficient funds to complete the sale. The seller also needs to be certain that all the requirements of the sales contract are met so the transaction can be completed. Both parties will want to inspect the settlement statement to ensure that all monies involved in the transaction have been accounted for properly. Both parties may be accompanied to settlement by their attorneys; although it is uncommon in North Carolina for the seller to have an attorney present at settlement. Real estate practitioners should also remember that their brokerage firm may be holding funds in anticipation of the settlement. Brokers holding such funds can transfer money to the closing agent no more than 10 days prior to settlement. Another possibility is that the brokerage firm notifies the closing agent that the monies will be retained by the firm as credit toward any earned brokerage fees. The broker also is held responsible by the North Carolina Real Estate Commission (NCREC) for the accuracy and delivery of the settlement statement either at closing or within three days after closing [see G.S. 93A-6(a)(14)]. This responsibility is met if the broker confirms that the closing attorney provides a copy of the completed settlement statement form to the parties. Note that some attorneys only provide the parties with their side of the closing figures. When this is done, the delivery requirement is also considered to be met.

Answer 745

Both the buyer and the buyer's lender want assurance that the seller's title complies with the requirements of the sales contract. After a thorough title search, the closing attorney usually submits a preliminary opinion on title to the title insurance company. Based on this opinion, the title insurance company will issue a title commitment. This is a commitment to issue a title insurance policy if the final title search confirms that the seller's title is marketable. On the date of the settlement meeting (the date of delivery of the deed), the buyer has a title commitment that was probably issued several days or weeks before the closing. For this reason, the final opinion on title and the title insurance policy are issued after closing. Unless the buyer is assuming the seller's mortgage loan, the seller's existing loan is paid in full and a mortgage release should be recorded. The exact amount required to pay off the existing loan is provided in a current payoff statement from the seller's lender, effective on the date of closing. This payoff statement states the unpaid amount of principal, interest due through the date of payment, the fee for issuing the certificate of satisfaction or release, credits (if any) for tax and insurance reserves, and the amount of any prepayment penalties. The same procedure is followed for any other liens that must be released before the buyer takes title. If there is an escrow account for the mortgage loan, it could be applied to the balance owed or it may be refunded after closing. For transactions in which the buyer assumes the seller's existing mortgage loan, the settlement agent needs to know the exact balance of the loan as of the closing date. It is customary for the settlement agent to obtain information from the lender that includes the terms of the mortgage loan being assumed. The settlement agent will have the buyer sign the assumption documents accepting the terms of the loan and the responsibility to repay the loan. The seller may also be required to execute an affidavit of lien waiver (affidavit of title). This is a sworn statement in which the seller assures the title insurance company and the buyer that there have been no judgments, bankruptcies, or divorces involving the seller since the date of the title examination. The affidavit promises that no unrecorded deeds or contracts were made, no repairs or improvements were made that have not been paid for, and the seller knows of no defects in the title. If the seller is the builder, the affidavit should address the payment of any subcontractors used in the construction process. The seller also affirms that he or she is in possession of the premises. This form is normally required before the title insurance company will issue an owner's policy to the buyer. The affidavit gives the title insurance company the right to sue the seller if the seller's statements in the affidavit are incorrect.

Answer 746

The attorney/settlement agent, normally selected and paid by the buyer, also represents the lender's interest. According to the NCBA/NCAR 2-T OPC, it is the buyer who chooses the time and place of the settlement.

Answer 747

First, the promises made in the sales contract are fulfilled. Second, the buyer's loan is finalized, and the mortgage lender or settlement attorney/agent disburses the loan funds. Additionally, the settlement/closing documents are reviewed and signed, and any funds due from the purchaser are collected.

Answer 748

The settlement agent may use the escrow-type closing if the parties cannot attend the settlement meeting. The parties can agree in advance who will act as escrow/settlement agent, and all funds and paperwork are delivered into escrow. The designated escrow agent is an impartial third party who conducts the settlement. When the deed has been prepared and delivered to the escrow agent, it is considered to have been legally delivered to the buyer under what is called the relation back doctrine. This type of closing is seldom used in North Carolina. In other states that practice this type of closing, title insurance companies and lending institutions often act as escrow agents.

Answer 749

One person, called the settlement agent or officer, usually conducts the proceedings at a closing and calculates the division of income and expenses between the parties (called settlement). In North Carolina, the settlement agent has historically been the buyer's attorney because so many of the functions performed at settlement are of a legal nature. In 2003, the North Carolina State Bar ruled in an ethics opinion that an attorney does not have to physically preside over the settlement meeting. Duties of a Nonlawyer A nonlawyer assistant under the direct supervision of an active member of the Bar may conduct the settlement meeting (identify documents to be signed, indicate the correct place to sign, and disburse proceeds) as long as that person does not engage in the unauthorized practice of law. The supervising attorney must be available to answer any legal concerns that may arise such as the need for legal advice on how to take title or the legal status of the title. NCREC strongly cautions that any real estate broker who conducts a settlement meeting under the above situation will be held fully responsible for all aspects of the closing.

Answer 750

Following the settlement meeting, the settlement agent will update the title search to verify that no recent recordings have occurred that would affect the title to the property. All pertinent documents then are recorded in the correct order to ensure continuity of title. For instance, if the seller is paying off an existing loan and the buyer is obtaining a new loan, the seller's satisfaction of mortgage should be recorded before the seller's deed to the buyer is recorded. The buyer's new mortgage or deed of trust must be recorded after the deed because the buyers cannot pledge the property as security for the loan until they own it. The transaction is closed when all documents have been recorded. Any seller's liens that were paid at closing will also be cancelled post-closing—sometimes as late as 30-60 days post-closing. The settlement agent can only disburse funds to the appropriate parties (including the real estate brokers) after recordation of the deed and the deed of trust. This delay in the disbursement of the proceeds is mandated by the North Carolina Good Funds Settlement Act (G.S. 45A).

Answer 751

Every real estate transaction must be reported to the IRS by the settlement agent on Form 1099-S. Information includes the sales price, the amount of property tax reimbursement credited to the seller, and the seller's Social Security number. If the closing agent does not notify the IRS, the responsibility for filing the form falls on the mortgage lender; although the brokers or the parties to the transaction ultimately could be held liable. The IRS requires Form 1099-S so that it may determine if capital gains taxes or other taxes are owed due to the sale of the property.

Answer 752

Whether a buyer is obtaining new financing or assuming the seller's existing loan, the lender wants to protect its security interest in the property. The lender has an interest in making sure that the buyer receives good, marketable title and that tax and insurance payments are maintained. Lenders want their mortgage liens to have priority over other liens. They also want to ensure that the insurance will be current if the property is damaged or destroyed. For this reason, a lender generally requires proof that the buyer has purchased both a title insurance policy for the benefit of the lender and a hazard insurance policy. In addition, a lender may require that the borrower provide additional information: a survey, a termite or other inspection report, or a certificate of occupancy (for newly constructed buildings). The lender also may request that a reserve or escrow account be established for tax and insurance payments. Lenders sometimes even require representation by their own attorney(s) at closings.

Answer 753

Most settlements involve a division of financial responsibility between the buyer and seller for such items as loan interest, taxes, rents, and fuel or utility bills. These allowances are called prorations. Settlement computations typically mean that each party pays for what they used or for the time they occupied the property during the appropriate period (month or year). Prorations are necessary to ensure that expenses are divided fairly between the seller and the buyer. For example, the seller may owe current taxes that have not yet been billed; the buyer will want this resolved at settlement. If real property taxes have been paid in advance, the seller is entitled to a rebate at settlement. If the buyer assumes the seller's existing mortgage or deed of trust, the seller usually owes the buyer an allowance for accrued interest through the date of closing. The seller is normally responsible for prorated expenses owed on the day of closing, except for the buyer's daily interim interest on a new loan that would be a single entry debit to the buyer.

Answer 754

are unpaid items to be prorated (such as unpaid current real estate taxes or interest on an assumed mortgage) that are owed by the seller but will be paid later by the buyer. The seller therefore pays for the seller's portion of the bill by giving the buyer credit for it at settlement. The seller receives a debit for that prorated share, and the buyer is given an equal amount as a credit.

Answer 755

are expenses that have already been paid by the seller prior to settlement and the buyer needs to rebate that portion to the seller. Examples would be real estate taxes already paid by the seller for the current year prior to settlement or prepaid homeowner association dues. The item is prorated and the buyer's allocated portion is reflected as a credit to the seller and as a debit to the buyer.

Answer 756

The nature of the item being prorated (i.e., annual versus monthly expense, calendar versus fiscal year) Whether it is an accrued item (unpaid) that requires the determination of an earned amount (i.e., an advance payment to the buyer) Whether it is a prepaid item (overpaid) that requires that the unearned amount (i.e., a refund to the seller) be determined What arithmetic processes must be used (see different methods)

Answer 757

This method is referred to as the banker's year/banker's month method (sometimes called the statutory method) and is, perhaps, the easiest to use but probably not the most accurate. (This is the method used for all prorations in the textbook and on the North Carolina Real Estate State License Examinations; although that tradition may change.) The year is treated as having 360 days with each month having 30 days.

Answer 758

This method is the most accurate and normally will be used in actual real estate settlements. If the settlement takes place in a leap year, then a 366-day year is used. Using this method, the actual days in the month are used. For instance, January would have 31 days, and November would have 30 days. The final proration figure will vary slightly, depending on which computation method is used. (Note that whichever method is used, in North Carolina, the seller is responsible for the day of closing on all prorations involving the seller unless otherwise agreed.) The final figure also will vary according to the number of decimal places to which the division is carried. All of the computations in this textbook and on the North Carolina Real Estate License Examinations are computed by carrying the division to three decimal places. The third decimal place is rounded off to cents only after the final proration figure is determined.

Answer 759

When the real estate tax is levied for the calendar year (from January to December) and is payable either during that year or in the following year, the accrued portion is for the period from January 1 through and including the day of closing. If the current tax bill has not yet been issued, the parties must agree on an estimated amount based on the previous year's bill and any known changes in assessment or tax levy for the current year, referred to as the best estimate method.

Answer 760

A tax proration could be a prepaid item. Because the real estate tax is due and payable on September 1, it may be paid before a settlement takes place. Tax prorations calculated for settlements taking place later in the year may reflect the fact that the seller has already paid the tax. The buyer then has to reimburse the seller for the buyer's portion of the taxes; the proration would be credited to the seller and debited to the buyer.

Answer 761

The following are some general prorating guidelines for preparing the settlement statement: In North Carolina, the seller owns the property on the day of settlement (regardless of what time of day the settlement meeting is scheduled), and prorations or apportionments are usually made through and including the day of settlement. It should be noted, however, that in some states, it is the custom for the buyer to pay for expense of ownership beginning on the day of closing. Any proration questions on the license examination will clearly state which party is responsible for the day of settlement. Always prorate for the seller first. If prorating an accrued item, once the seller's portion is computed, the buyer's amount will be the same, but an opposite entry: if a debit to the seller, it is a credit to buyer, and it is the same amount of money. (Think of the entries as if they represented a personal check from one party payable to the other party; the check amount is the same when it is written and when it is received.) If prorating a prepaid item, subtract the seller's portion from the total bill to determine the buyer's portion. The buyer's portion will be the same amount on the seller's entry: a credit to the seller and a debit to the buyer. Accrued or prepaid real estate taxes are usually prorated at settlement. When the amount of the current real estate tax cannot be determined definitely, the proration is usually based on the last obtainable tax bill. Special assessments for municipal improvements such as sewers, water mains, or streets are usually paid in annual installments over several years, with annual interest charged on the outstanding balance of future installments. The seller normally pays the entire balance due, unless the buyer and seller have agreed otherwise in the sales contract. The special assessment generally is not prorated at settlement. The contract of sale must address the manner in which special assessments are to be handled at settlement. Rents are usually adjusted on the basis of the actual number of days in the month of settlement in real life situations. It is customary for the seller to receive the rents for the day of settlement and to pay all expenses for that day. If any rents for the current month are uncollected when the sale is closed, the buyer often will agree by a separate letter to collect the rents if possible and remit the pro rata share to the seller. If the seller is holding a tenant security deposit, it can be transferred to the buyer by a double-entry (debit seller/credit buyer). The tenant security deposit is not prorated because it is the tenant's money not the seller's.

Answer 762

Interest paid on almost all mortgage loans is simple interest. On almost every mortgage loan, because the interest is paid in arrears, buyers and sellers must understand that the mortgage payment due on June 1, for example, includes interest due for the month of May. Thus, if the buyer is getting a new loan, the lender will start charging interest on the day of settlement and will normally collect interim interest for the day of settlement through the last day of the settlement month from the buyer (single entry debit to buyer) at settlement. The buyer will usually have at least one day of interim interest but never more than one month's worth. The buyer will not make a monthly payment until the first of the second month. Furthermore, the buyer who assumes a mortgage on May 18 and makes the June payment will be paying for the time the seller occupied the property and should be credited with the seller's part of the month's interest.

Answer 763

that this is not a prorated item. It is a cost to be paid only by the buyer to the buyer's lender; therefore, the day of settlement belongs to the buyer. Interim interest adjustment is the only time the buyer will pay for the closing day.

Answer 764

Security deposits made by tenants to cover the last month's rent of the lease or to cover the cost of repairing damage caused by the tenant are generally transferred in their entirety by the seller to the buyer (debit seller/credit buyer), not prorated.

Answer 765

Real property taxes may be handled as a double-debit under certain circumstances: (1) agreement of the buyer and seller, (2) seller has received the tax bill, (3) the taxes have not been paid, and (4) the taxes are to be paid at settlement to satisfy the tax lien.

Answer 766

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") following the economic recession and the mortgage market meltdown during the mid-2000s. The Dodd-Frank Act is considered one of the most comprehensive financial regulatory system reforms in decades. Effective in 2010, the Act created the Consumer Financial Protection Bureau (CFPB) and transferred the enforcement of various consumer protection laws to this new agency. The Dodd-Frank Act primarily targets those lenders who extend consumer credit, including residential mortgage lenders. The CFPB was tasked with the responsibility of handling the perceived inadequacies of lender disclosure practices among residential mortgage lenders. Part of the issue was the redundancy in disclosures required by the Truth-in-Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). These laws required that borrowers receive an early Truth-in-Lending (TIL) disclosure and a Good Faith Estimate (GFE) form within three days of loan application. One day prior to closing, borrowers received a final TIL and a HUD-1 Settlement Statement. The CFPB responded to the task by integrating the disclosures in such a way as to satisfy the requirements of the TILA and RESPA. Thus the new rules are referred to as the TILA/RESPA Integrated Disclosure (TRID) rules. The implementation of the new forms began on October 3, 2015. Loan applications received on or after October 3, 2015, must comply with the new rules. The GFE and the early TIL have been replaced by the Loan Estimate (LE) form. The HUD-1 and final TIL have been replaced by the Closing Disclosure (CD) (see New Disclosure Forms).

Answer 767

The federal Real Estate Settlement Procedures Act (RESPA) was enacted in 1974 to protect consumers from abusive lending practices. RESPA also aids consumers during the residential mortgage loan settlement process. It ensures that consumers are provided with important, accurate, and timely information about the actual costs of settling or closing the transaction. It also eliminates kickbacks and other referral fees that tend to inflate the costs of settlement unnecessarily. RESPA prohibits lenders from requiring excessive escrow account deposits. RESPA requirements apply when the residential purchase is financed by a federally related mortgage loan. Federally related loans are loans made by banks, savings associations, or other lenders whose deposits are insured by federal agencies. The term also covers loans insured by the FHA or guaranteed by the VA; loans administered by HUD; or loans intended to be sold by the lender to Fannie Mae, Ginnie Mae, or Freddie Mac. As of July 21, 2011, the Real Estate Settlement Procedures Act (RESPA) is administered and enforced by the Consumer Financial Protection Bureau (CFPB). RESPA is implemented by rules referred to as Regulation X. RESPA regulations apply to residential mortgage loans made to finance the purchase of one-family to four-family homes, cooperatives, and condominiums or property where such a dwelling will be constructed or placed within two years of settlement. RESPA also governs second or subordinate liens for home equity loans. RESPA does not normally cover a transaction financed solely by a purchase money mortgage taken back by the seller, an installment contract (contract for deed), or the buyer's assumption of the seller's existing loan. Loans for business, commercial, or agricultural purposes, or for property of 25 acres or more are also exempted. The federal Truth-in-Lending Act (TILA) has a broader scope than that of RESPA. TILA laws and regulations apply to anyone who advertises or makes loans for a personal, family, or household purpose that involve either a finance charge or are payable in more than four installments. TILA applies not only to banks, savings, and loans but also to finance companies, mortgage companies, and anyone who extends consumer credit more than five times a year. Whether the loan is for a primary or secondary residence, vacation home or vacant land, regardless of the loan amount, if the loan proceeds are for a personal, family, or house purpose, the lender must comply with TILA. The TRID rules were made part of the Truth-in-Lending Act and as a result, the integrated disclosure forms, namely the LE and the CD, must be used by lenders in transactions involving federally related mortgage loans government by RESPA. Transactions Subject to New TRID Rule illustrates transactions that are subject to the new TRID rule.

Answer 768

TRID rules mandate that lenders and settlement agents provide certain disclosures and documents to borrowers in a timely way relative to loan application and loan closing. The new rules redefined loan application and the timing of the required disclosures. According to TRID, loan application is defined as the time by which the lender receives the following information from the borrower: Legal name Statement of gross income Social Security Number (to obtain a credit report) Property address Estimate of property value Amount of mortgage loan required

Answer 769

Within three business days of receiving the loan application, lenders must provide the following: Special information booklet: Lenders must provide a copy of a special informational HUD booklet, Your Home Loan Toolkit, to every person from whom they receive or for whom they prepare a loan application. The booklet provides the borrower with general information about shopping for a house and a loan, plus information about the closing process. It also explains the various provisions of RESPA, including a line-by-line explanation of the CD form used at settlement. Loan Estimate (LE): The three-page Loan Estimate (formerly the Good Faith Estimate [GFE]) makes it easier for borrowers to compare loan conditions from one lender to another. The only fee that the lender may collect before the applicant receives the LE is for a credit report. Once the LE is issued, lenders are committed and may only modify the LE in certain specific instances. If certain information or circumstances change after the original LE is issued, then a new LE must be issued. Issuing a new LE triggers a new three-day waiting period, in which case, closing may not occur until after three days have passed. The LE indicates which settlement costs may or may not change prior to settlement and if they do, by how much. Lenders are bound by tolerance limits on fee estimates that were imposed in 2009/2010; although these limits are now called permissible variations. The fees are divided into three categories: No tolerance: fees that may not increase before closing; lender charges for taking, underwriting, and processing the loan application, including points, origination fees, and yield spread premiums 10% tolerance: fees that cannot increase by more than 10% in any given category; settlement services for which the lender selects the provider or for which the borrower selects the provider from the lender's list, title services and title insurance if the lender selects the provider, and recording fees Unlimited tolerance: fees for services that are out of the lender's control; services for which the borrower chooses the provider (such as escrow and title insurance), escrows for taxes, mortgage interest, and the cost of homeowners insurance If there is a violation of the permissible limits, lenders will have to credit the borrower for the excess costs, generally with 60 days of settlement. Typically, however, the lender will take care of the violation at the settlement meeting.

Answer 770

Once the lender has received the required information from the borrower, the lender may not require additional documentary support prior to issuing the LE. The lender must provide the LE to the prospective borrower within three business days unless the consumer withdraws the application or the lender determines it can't approve the loan as requested and so notifies the consumer. Lenders may not charge the consumer any fees prior to providing the LE, other than a reasonable fee for a credit report, unless the consumer indicates an intent to proceed.

Answer 771

Brokers should have a general understanding of what transactions are subject to TRID And the timing and purpose of the Loan Estimate. Brokers working with buyers in covered transactions should be aware that the buyer-borrower is entitled to receive the Loan Estimate within three business days of loan application (i.e., the lender's receipt of 6 items of information) and that the purpose is to allow buyers to compare the cost of the desired credit. Note: Most of the information on the Loan Estimate relates to the loan itself and there is no information regarding the borrower's amount or source of income, monthly expenses, or credit score. Nevertheless, it may be good practice for listing agents to follow up with buyers' agents to make sure that the loan application process is progressing in a timely way. Buyers' agents may want to ask their clients for a copy of the LE and review it with them.

Answer 772

Prior to the enactment of the TRID rules, RESPA required that the Uniform Settlement Statement (also known as the HUD-1) be used to itemize the charges paid by a borrower and a seller in connection with the settlement, whether required by the lender or another party, or paid by the lender or any other person. For loan applications received on or after October 3, 2015, under the new TRID rules, borrowers will see at settlement a five-page CD form and sellers may see a two-page CD form itemizing their expenses. Why may there be two separate Closing Disclosure forms? The buyer's CD includes Truth-in-Lending required information about the buyers' loan, such as interest rate, term, down payment, amount financed, et cetera, that disclosure to the seller might violate the buyers' right to privacy under the federal Gramm-Leach-Bliley Act. The CFBP decided that settlement agents should be allowed to provide separate versions of the CDs, showing only information relevant to that party's side of the transaction. Nevertheless, TRID rules do permit settlement agents to provide the seller with a separate CD or with a copy of the Buyer's Closing Disclosure (BCD) as long as it contains the seller's information. If settlement agents do so, they must provide a copy of Seller Closing Disclosure (SCD) to the borrowers' lender but not to the borrower. While the buyer may not see the SCD, the buyer will have a summary of the seller's side of the transaction on the BCD. IN PRACTICE Of most significance to brokers is the requirement that lenders must insure that the borrower receives the completed BCD three business days prior to the settlement meeting. (The TRID rules refer to this day as the consummation, or the point at which the borrower becomes obligated on the loan.) Under the TRID rules, a business day is Monday through Saturday but excludes Sundays and federal holidays. There are two methods of delivering the borrower's CD, namely personal delivery (i.e., handing it to the borrower in person); or any other method (e.g., United States mail, fax, email, etc.). However, if the Borrower CD is delivered by any method other than personally, the lender must add three more business days for delivery, meaning that it must be sent not later than six business days prior to settlement. As example, if the Borrower's CD is hand-delivered to the borrower on Monday, the earliest possible date settlement could occur is Thursday, assuming no intervening federal holidays. As another illustration, if the BCD was emailed on a Monday, the earliest date for a settlement meeting would be the following Monday—again, assuming there were no intervening federal holidays. Many lenders have invested in software that will permit them to send the BCD electronically and for the borrowers to indicate electronic receipt as well. If buyers indicate receipt of the BCD earlier than the three-day delivery period, it could permit the settlement day to be earlier is well. For example, if a lender electronically sends the BCD on Monday and then receives notice of the borrowers' receipt on Tuesday, then the settlement could take place as early as Friday (the three-day right of review would begin on Tuesday and end on Friday.) The purpose of the three-day waiting period is to permit the buyers to have adequate time to review the BCD and make sure that they are receiving the loan terms that they were promised and to have time to obtain the necessary funds to close. Prior to the enactment of TRID, settlement agents had to give the borrowers just one day's notice of settlement and most likely, settlement agents gave the settlement information on the day of closing, hardly enough time for consumers and/or their brokers to prepare for settlement. These dates for delivery and review are not negotiable. Even if the sellers and the buyers want to hasten their settlement meeting, settlement agents cannot comply with this request. Thus it is crucial that brokers educate their clients and customers about these disclosure timelines. Brokers should understand the following issues as well: The three business days prior to settlement applies only to the Borrower's CD, not the SCD. There is no rule requiring delivery of the seller's closing disclosure to the seller prior to the settlement meeting. Delivery must be to the borrowers personally, not to any broker acting as a buyer agent. The lender, not the settlement agent, will decide whether to issue one or two separate CDs and any other settlement statements authorizing disbursement of the proceeds. If the lender decides to issue two separate Closing Disclosures, a broker acting as a dual agent should only give each party that party's CD, and not the other party's CD, as the lender chose to issue separate CDs for a reason.

Answer 773

review and confirm that all charges and credits have been properly debited or credited to the seller or buyer and are entered in the correct column; and review and confirm the accuracy of the calculations for all prorated items, escrow reserves, interim interest, excise tax and the "bottom line figures" (i.e., total settlement charges to each party, cash from borrower-buyer, and cash to seller). If a broker is aware of any expense related to the transaction paid to or by either party or any third party that is not included on the settlement statement, the broker must notify both the settlement agent and the lender of the omission, as the settlement statement should reflect all expenses and payments related to the transaction, not just monies the settlement agent disburses. Failure to notify the lender of any such expense or payment would be considered willful failure to disclose a material fact (e.g., not telling the lender that the buyer's friend lent them money for closing costs; that the builder-seller is giving the buyer a $200 gift card; or that the $450 paid to the home inspector prior to closing was paid by the borrower's parents). Understand, none of the foregoing acts is illegal so long as it is disclosed to and approved by the lender and it appears in the proper column on the settlement statement/Closing Disclosure. If the lender doesn't approve the payment, then the borrower/buyer can't accept it. A broker should notify the settlement agent if the broker believes there are any errors or omissions on the disclosure statement. As settlement agents, attorneys, and brokers adapt to the TRID rules, it is likely that there are going to be delays in settlement. Brokers should advise their clients accordingly. It may be advisable to perform certain tasks sooner, such as title searches, gathering invoices and documenting expenses to be paid at closing (taxes, insurance, seller's loan payoffs, repairs, owner association information, home warranty premium, etc.). Lenders will need this information at least two to three weeks prior to settlement so they can prepare the BCD and deliver it at least three to six days prior to consummation. Buyers may also discover that attorneys are asking them to sign engagement letters, making buyers responsible for any legal fees, such as a title search, which may need to be performed more than a week prior to settlement in order to assure the lender of clear title. The confusion for brokers arises in situations where the closing attorney is not using the HUD-1 or any other familiar form of a closing statement in addition to the required closing disclosures. The closing disclosure for the buyer, and the closing disclosure for the sellers, when viewed together, are sufficient.

Answer 774

TRID rules permit a settlement agent to provide the seller with a separate CD or with a copy of the BCD as long as it contains all of the seller's transaction information. A broker representing the seller should review the disclosure and report any inaccuracies. The broker may or may not be given a copy of the BCD. In that case, the broker is not obligated to disclose what the broker is not given. A broker may not refuse to look at the disclosure if offered or emailed to the broker, but if the broker is not provided with a copy of the BCD, the broker must review the seller's disclosure and correct any errors contained therein. If a broker knows or reasonably should know of a receipt or disbursement related to the transaction that is left off either disclosure, the broker must disclose the possibility of the receipt or disbursement as a material fact to the closing attorney and lender.

Answer 775

If the settlement agent provides the seller with a separate disclosure, then the settlement agent must also provide a copy of the Seller's Closing Disclosure to the borrowers' lender but not to the borrower. While the buyer agent may not necessarily see the Sellers' Closing Disclosure, the buyer agent may see a summary of the sellers' side of the transaction on page 3 of the buyer's Closing Disclosure, as with a HUD-1 (if used). A broker representing the buyer may still rely on these but should review the buyer's disclosure and the summary of the seller's side, and report any discrepancies or omissions. Again, the broker is not obligated to disclosed information not provided. The Commission will continue to monitor this process as it evolves and if a statutory change is necessary, will proceed in that direction. For the time being, brokers should review the disclosures or closing statements they have access to, refrain from avoiding access when offered, and be sure to disclose any errors, discrepancies, or omissions of which they know or should have known.

Answer 776

For the real estate consumer, a service that continues to increase in popularity is one-stop shopping. A real estate firm, title insurance company, mortgage broker, home inspection company, and even a moving company may agree to offer a package of services to consumers. RESPA permits such a controlled business arrangement (CBA) as long as the consumer is clearly informed of the relationship among the service providers and that other providers are available. Required use of a particular service provider is prohibited by RESPA. Fees may not be exchanged among the affiliated companies simply for referring business to one another. This may be a particularly important issue for brokers who offer computerized loan origination services to their clients and customers. While a borrower's ability to comparison shop for a loan may be enhanced by a CLO system, the range of choices must not be limited. Consumers must be informed of the availability of other lenders.

Answer 777

During the 1990s and early 2000s, to encourage mortgage brokers to make the numerous types of low or no closing costs loans, lenders needed to find a way to compensate the mortgage brokers that sold these loans to marginal borrowers. A substantial fee, known as a yield spread premium, was paid to the mortgage brokers for making loans to subprime borrowers at above-market interest rates. Due to abuses of the yield spread premiums in the lending industry, RESPA now requires that the loan originator give the borrower a credit against the loan origination fees for the full amount of any yield spread premium. This credit must appear in the loan origination section of the LE.

Answer 778

RESPA prohibits lenders from requiring borrowers to deposit amounts in escrow accounts for taxes and insurance that exceed certain limits, thus preventing the lenders from taking advantage of the borrowers. While RESPA does not require that escrow accounts be set up, certain government loan programs and some lenders require escrow accounts as a condition of the loan. RESPA places limits on the amounts that a lender may require: on a monthly basis, the lender may require only one-twelfth of the total of the disbursements for the year, plus an amount necessary to cover a shortage in the account. No more than one-sixth of the year's total disbursements may be held as a cushion (a cushion is not required). Once a year, the lender must perform an escrow account analysis and return any amount over $50 to the borrower.

Answer 779

Servicers of all federally related mortgage loans must disclose at the time of loan application if the servicing of the loan can be sold, transferred, or assigned to another servicer during the term of the loan. If the servicing is ever transferred, the borrower must be notified in writing from both the original and subsequent servicing entity. The notice must include the date of transfer, new payment address, and phone numbers for both servicing entities so the borrower can call for clarification. These requirements are in place each time the loan servicing is transferred during the term of the loan.

Answer 780

RESPA prohibits the payment of kickbacks, or unearned fees, incident to or as part of a real estate settlement service. It prohibits referral fees when no services are actually rendered. The payment or receipt of a fee, kickback, or anything of value for referrals for settlement services is prohibited for activities such as mortgage loans, title searches, title insurance, or services rendered by attorneys, surveyors, home inspectors, or appraisers. While RESPA governs unlawful referral fees to or from individuals or entities involved in real estate transactions, North Carolina statutes govern unlawful referral fees to unlicensed individuals (see Appendix A). Note: Real estate agents may neither pay nor accept any referral fee from a settlement service provider, such as an appraiser, home inspector, attorney, etc. Real estate brokers are only permitted to pay and receive referral fees from each other. The law/rules also regulate controlled or affiliated business arrangements (CBA) that provide real estate services (e.g., brokerage, mortgage loan, legal services, home inspections, etc.) under a one-stop shopping approach.

Answer 781

Violations of RESPA can elicit civil and criminal penalties, which include criminal fines up to $10,000 per violation; imprisonment up to one year; injunctions against illegal activity and orders to compensate victims for illegal profits; and civil lawsuits that may award treble damages plus legal fee reimbursement.

Answer 782

Usually the buyer brings a certified or official bank check or has the funds wired to the settlement attorney's escrow account. Although cash is definitely certified funds, the buyer who brings a bag of money to pay the bills at settlement may encounter resistance from the settlement agent because large amounts of cash (typically over $10,000) will trigger paperwork requirements by either banking regulations and/or the USA PATRIOT Act.

Answer 783

If either of the parties' attorneys is to be paid from the closing proceeds, that party is charged with the expenses on the settlement statement. The attorney's fee may include preparation or review of documents, title search and opinion, or representation of the parties at settlement.

Answer 784

The seller usually pays for recording charges (filing fees) necessary to clear all defects in order to furnish the purchaser with a marketable title. Items customarily charged to the seller include the recording of release deeds or satisfaction of mortgages, quitclaim deeds, affidavits, and satisfaction of mechanic's lien claims. The purchaser pays for recording charges that arise from the actual transfer of title. Usually such items include recording the deed that conveys title to the purchaser and the mortgage or deed of trust executed by the purchaser. If the NCBA/NCAR 2-T Offer to Purchase and Contract is used, recordation of the deed is required by contract to complete the closing process.

Answer 785

North Carolina requires an excise tax (formerly known as revenue stamps) on the gross revenue generated by the sale of real estate. This tax, sometimes called a deed transfer tax, is levied at a rate of $1 per $500 of value, or portion thereof. The excise tax will always round up to the next whole dollar amount if the calculation includes cents. This expense is borne by the seller.

Answer 786

Custom usually requires that the buyer obtain and pay the title examination. Most of the time, this charge will be included in the attorney's fee. Evidence of title relied on in the purchase of a parcel of real estate includes a title guaranty or a fee policy of title insurance. The title guaranty and fee policy of title insurance are one-time premium charges for insurance that insures the purchaser's title during the period of ownership of real estate. Some lenders request an ALTA policy that insures the mortgagee for the amount of the mortgage loan, called a lender's policy. A buyer may also purchase an owner's policy to protect the entire purchase price; this higher level of coverage is always a good investment.

Answer 787

created the North Carolina Real Estate Commission (NCREC) and empowered it to write and enforce reasonable rules and regulations concerning the business activities of real estate licensees. The real estate license applicant is required to be knowledgeable of the License Law and Commission Rules. Students are encouraged to read the laws and rules.

Answer 788

Listing (or offering to list) real estate for sale or rent Selling or buying (or offering to sell or buy) real estate Leasing or renting (or offering to lease or rent) real estate Conducting (or offering to conduct) a real estate auction Selling, buying, leasing, assigning or exchanging any interest, in connection with the sale or purchase of real estate Referring a party to a real estate licensee, if done for compensation

Answer 789

Receive and forward phone calls and electronic messages to licensees. Submit listings and changes to a multiple listing service, but only if the listing data or changes are compiled and provided by a licensee. Secure copies of public records from public repositories (i.e., register of deeds office, county tax office, etc.). Place "for sale" or "for rent" signs and lock boxes on property at the direction of a licensee. Order and supervise routine and minor repairs to listed property at the direction of a licensee. Act as a courier to deliver or pick up documents. Provide to prospects basic factual information on listed property that might commonly appear in advertisements in a newspaper, real estate publication or internet website. Schedule appointments for showing property listed for sale or rent. Communicate with licensees, property owners, prospects, inspectors, etc. to coordinate or confirm appointments. Show rental properties managed by the employee's employing broker to prospective tenants and complete and execute preprinted form leases for the rental of such properties. Type offers, contracts and leases from drafts of preprinted forms completed by a licensee. Record and deposit earnest money deposits, tenant security deposits and other trust monies, and otherwise maintain records of trust account receipts and disbursements, under the close supervision of the office broker-in-charge, who is legally responsible for handling trust funds and maintaining trust accounts. Assist a licensee in assembling documents for closing. Compute commission checks for licensees affiliated with a broker or firm and act as bookkeeper for the firm's bank operating accounts. Exemptions Business entity selling or leasing entity-owned real estate Attorney-in-fact Attorney-at-law Person acting under a court order (e.g., receiver, trustee, guardian, administrator, executor) Trustee Salaried employees of broker-property managers Individual property owner selling or leasing personally owned real estate Housing authority under G.S. 157

Answer 790

Annual License Renewal Affiliation with a Broker-in-Charge (BIC) Timely Completion of Postlicensing Education (90 Hours) Timely Completion of required CE (GENUP plus one Elective) each license year after first license renewal

Answer 791

Annual License Renewal Timely Completion of required CE each license year after first license renewal

Answer 792

Firm / BIC Affiliation Sole Proprietorship - Rule A.0110(b)

Answer 793

Full Brokers who opt for active status without BIC affiliation or designation cannot advertise themselves as brokers in any way, including referral business Rule A.0110(b) (b) Every broker who is a sole proprietor shall designate himself or herself as a BIC if the broker: (1) engages in any transaction where the broker is required to deposit and maintain monies belonging to others in a trust account;(2) engages in advertising or promoting his or her services as a broker in any manner; or (3) has one or more other brokers affiliated with him or her in the real estate business.

Answer 794

Broker is ready to serve as BIC whenever needed BIC designation is not required to achieve BIC Eligible status BIC Eligible status and designation as a BIC can be done at the same time

Answer 795

Active, Full Broker License (non-provisional) 2 years of full-time brokerage experience within previous 5 years Submission of Request for BIC Eligible Status and/or BIC Designation Form (REC 2.25) Completion of 12-Hour Broker-in-Charge Course can be done no earlier than one year prior to application and no later than 120 days after application. Taking the 12-hour BIC Course does NOT automatically make you BIC Eligible.You must submit a request for BIC Eligible Status and/or BIC Designation form (REC 2.25)

Answer 796

Timely annual renewal of Broker license Timely completion of annual BICUP beginning in the year of designation unless GENUP was completed prior to designation Timely annual completion of an NCREC-approved Elective

Answer 797

Designation as BIC of an Office at a New or Existing Firm Designation as BIC of a New or Existing Sole Proprietorship Definition: Non-entity business owned by one person who is liable for all debts & obligations of the company May have Affiliated Brokers－Registration of Assumed Name with Secretary of State (SOS)

Answer 798

Ensuring that Affiliated Brokers maintain Active Licensure Providing "Active & Direct" Supervision of PBs Ensuring Compliance with Agency Agreement & Disclosure Rules Maintaining the Trust Account per Commission Rules Advertising Retaining Records Notifying Commission of Changes in Firm Name or Address within 10 days Office Rule: No broker can be the broker-in-charge at more than one physical location. If more than one real estate firm occupies the same physical space and has an identical mailing address, one broker may serve as broker-in-charge for multiple firms. Every real estate office must have a BIC; multiple firms at one location can have more than one BIC at that location. Remember: There is one BIC per entity per location.

Answer 799

Pass course and receive certification Order background check Complete NCREC application Submit application to NCREC Pass state examination Receive license from NCREC

Answer 800

All real estate licenses expire on June 30 each year. An annual renewal fee must be paid by all brokers and firms to the NCREC to maintain a CURRENT license. A $45.00 fee must be received no later than midnight on June 30. Licensees should pay renewal fees on the NCREC website (www.NCREC.gov) May 15–June 30 each year. Paying the renewal fee keeps license on "CURRENT" status. Annual renewal is required to maintain an active or inactive license. Brokers who fail to pay the renewal fee will have their license placed on expired status.

Answer 801

A license is expired if the renewal fee was not received on time. An expired license means NO license. There is no grace period. If your license expires June 30, you may not practice brokerage on July 1. Exception: Military personnel/brokers on active deployment during renewal may request special consideration.

Answer 802

If the license has been expired up to 6 months, individuals must pay a $90 fee online and submit the Activation Form (REC 2.08). If the license expired or was revoked between 6 months and 2 years, individuals must submit an application including a criminal background report, pay the $90 fee, and take either one postlicensing course or the license exam. They must also submit Activation Form (REC 2.08). If the license has been expried or revoked for 2 or more years, individuals must start the licensing process over from the beginning.

Answer 803

An active license means the licensee is up-to-date on CE and/or postlicensing. Inactive means there is an education deficiency (or a provisional broker without BIC, or an election to be inactive). Every broker must take an update course (4 hours). BIC-eligible brokers must take the BIC Update course to retain BIC-eligible status. Brokers must also take an elective (4 hours) every license year, by June 10. If an individual does not complete CE by the June 10 deadline, the license will be inactive July 1 and they must stop all brokerage activities. Example: A broker took the update course in May but forgot to take an elective by June 10. May the broker take an online elective on June 12? Answer: No. CE courses may NOT be offered June 11-30.

Answer 804

Active brokers must complete 8 hours of continuing education (CE) each year no later than June 10. The CE requirement begins for the second license renewal. Licensees must complete a four-hour update course and a four-hour elective. Non-BICs take the General Update course. BICs and BIC-eligible take the BIC Update course.

Answer 805

Must continue to pay renewal fee each year or license will expire Do not have to meet continuing education (CE) requirements while inactive May have to complete a maximum of 16 hours of CE or correct any education deficiency before reactivating Are still subject to disciplinary action from the Commission

Answer 806

Become automatically inactive when not supervised by a broker-in-charge Need to provide proof of supervision to reactivate Example: An individual's license is inactive because they didn't take CE. What does the individual need to do to reactivate it? Answer: It depends on how long the license has been been inactive. If less than 2 years with CE deficiency: Complete current year's CE (Update and Elective) AND Take elective courses to make up missed hours from last year (4 or 8 hours), then Submit Activation form (2.08) If more than 2 years with CE deficiency: Pass two 30-hour Postlicensing courses Complete current year's CE (Update and Elective), then Submit activation form (REC 2.08) within 6 months of course completion. Note that the Commission doesn't automatically activate licenses. You/your BIC must submit the form (2.08) to notify the Commission you want Active status and identify your office affiliation.

Answer 807

Beginning July 1, 2020, brokers must complete all 3 classes in first 18 months of licensure. Note: Credit for postlicensing courses is only valid for 2 years from the date of completion.

Answer 808

Post 301-Broker Relationships and Responsibilities Post 302-Contracts and Closing Post 303-NC Law, Rules, and Legal Concepts

Answer 809

Each applicant for a license as a real estate broker shall be required to pay a fee ($100) Checks, credit cards and other forms of payment given the Commission for fees due (including the $45 annual renewal fee) which are returned unpaid shall be considered cause for license denial, suspension, or revocation

Answer 810

Every broker must produce a legible form of the pocket card issued by the NCREC every license year as evidence of licensure whenever requested while engaging in real estate brokerage.

Answer 811

Brokers must notify the Commission in writing of all changes in personal information within 10 days of each change

Answer 812

Licensees must report to the Commission any criminal convictions for a felony or misdemeanor, or any disciplinary action taken against them by any other occupational licensing board, or any restriction, suspension or revocation of a notarial commission within 60 days of the final judgement or order in the case

Answer 813

Brokers are not allowed to draft terms of a sales contract, which would be the unlawful practice of law (even at the instruction of a principal/client). Brokers may complete forms by filling in the blanks on the preprinted contract form. Brokers should be competent in their ability to explain the meaning of the form to buyers and sellers.

Answer 814

A broker must have proper authority to advertise. A broker may not advertise or display a "for sale" or "for rent" sign on a property without the written consent of the owner. A broker may not advertise any brokerage service for another without consent of the broker-in-charge. A broker must include in any advertisement the name of the firm or sole proprietorship with which the broker is associated. "Blind ads" are prohibited. All advertising by a licensee must indicate that it is the advertisement of a broker or brokerage firm.

Answer 815

A broker must deliver copies of any transactional documents to customers and clients immediately but in no event later than three days of the broker's receipt of the executed document. A broker must provide clients with a detailed and accurate closing statement. A broker can rely on a closing statement prepared by an attorney but must review the statement for accuracy.

Answer 816

Brokers are required to retain records pertaining to their brokerage transactions for three years from the successful or unsuccessful conclusion of the transaction or the disbursement of all trust monies pertaining to that transaction, whichever occurs later. Brokers must also provide a copy of all transactional documentation to the firm or sole proprietorship with which they are affiliated within 3 days of the broker's receipt.

Answer 817

A licensee shall not receive, either directly or indirectly, any commission, rebate, or other valuable consideration of more than nominal value from a vendor or a supplier of goods in a real estate transaction without the written consent of the licensee's principal. A licensee shall not receive, either directly or indirectly, any commission, rebate, or other valuable consideration of more than nominal value for services which the licensee recommends without full and timely disclosure to such party.

Answer 818

A licensee may NOT disclose the price or other material terms contained in a party's offer to purchase, sell, lease, rent, or to option real property to a competing party without the express authority of the offering party.

Answer 819

A material fact is any fact that is important or relevant to the issue at hand. These must be voluntarily disclosed. Material facts are any facts that might affect the principal's decision in a transaction. Disclosure is owed to all parties to the transaction regardless of whom the broker represents in the transaction Material facts include facts about the property itself facts relating directly to the property facts relating directly to the agent's principal to complete the transaction, and facts known to be of specific importance to a party. Issues declared material by the NCREC and North Carolina General Assembly include exterior insulating and finishing systems (EIFS or synthetic stucco), leaking polybutylene pipes (even if repaired), and meth lab sites. Latent defects are hidden defects that would not be uncovered by ordinary inspection; there is a duty to attempt to discover any latent defects that threaten structural soundness or personal safety

Answer 820

This occurs when a licensee does not have actual knowledge of a matter and gives wrong information to a consumer without regard for the truth. The licensee simply tells the consumer whatever it takes to get the deal done.

Answer 821

These properties are psychologically impacted in a way that makes them undesirable properties. Examples could include ghosts, death, illness, criminal activity, or other tragedies. Reputation as a haunted property is not a material fact in North Carolina.

Answer 822

If asked about the death or illness, an agent may refuse to answer, but if they choose to answer, they must answer truthfully. If the death or illness is AIDS or HIV related, this falls under fair housing laws protected class of handicapping condition, and the query cannot be addressed.

Answer 823

It is not a violation of license law to voluntarily disclose the presence of a registered sex offender or to advise a prospective buyer or tenant to visit the sex offender registry as long as the information provided is factual.

Answer 824

A provisional broker may not accept a commission or any valuable consideration from any person except his or her BIC or licensed broker by whom he or she is employed. In addition, a provisional broker shall not represent or attempt to represent a real estate broker other than with the broker they are currently associated, without the express knowledge and consent of their BIC.

Answer 825

An affiliated broker shall not be paid compensation or a referral fee directly by anyone other than their current BIC or the person who served as their BIC at the time of the transaction.

Answer 826

The Commission has cited $25 or a $50 dinner gift certificate as nominal compensation that does not require disclosure to a principal. Licensees are prohibited from compensating or sharing compensation with unlicensed persons in any manner. Exception: Parties to the transaction. Licensees may pay referral fees to licensed brokers and unlicensed travel agents.

Answer 827

Any breach of the duty to exercise skill, care, and diligence on behalf of a client. Example: Failure to properly complete (fill in) real estate contracts or to use contract forms that are legally adequate.

Answer 828

Duty to avoid improper conduct and to be honest in all dealings with the principal: General duty to treat any party honestly and fairly and to avoid conduct that constitutes improper, fraudulent or dishonest dealing Example: The seller does not show up for closing. In order to avoid a delay in closing, the broker forges seller's signature on a deed and proceeds with closing. Other Duties Duty to deliver a copy of any written agency and transactional documents to client or customer within three (3) days of broker's receipt of the executed document Must deliver offers immediately and in no event later than three days of the broker's receipt of the executed document Duty to properly account for funds held in trust for the principal and to properly account for funds belonging to others which come into the broker's possession Duty to avoid commingling Duty to deliver to the client a detailed and accurate closing statement

Answer 829

The North Carolina Real Estate Commission (NCREC) is composed of 9 members. At least 3 must be licensed brokers. At least 2 must be "public members" who are not involved directly or indirectly in the real estate brokerage or appraisal business.

Answer 830

The NCREC is responsible for licensing real estate brokers, firms, and registering time-share projects. It also approves real estate schools and instructors. Its purpose is to protect the public in dealings with real estate brokers. It educates and informs the public and brokers, and regulates real estate business activities of brokers. The Commission may not practice law, fine licensees for violations of license law or Commission rules (may fine time-share developers), declare contracts void, or determine commissions or fees charged by licensees or brokerage firm (a violation of antitrust law). The Commission may not draft or prescribe real estate contract forms (though it does set the minimal requirements for forms), act as a board of arbitration (cannot settle disputes between parties regarding such matters as commissions), or order brokers to reimburse trust funds or to compensate buyers or sellers for losses.

Answer 831

The Commission will investigate all verified written complaints and may randomly investigate a licensee upon the Commission's own volition. Disciplinary actions include reprimand, censure, license suspension, and license revocation. A violation is a criminal offense (misdemeanor) that can be prosecuted in court. A court can fine or imprison a licensee. A court can also recommend that the Commission revoke a real estate license. Only the NCREC can revoke a real estate license.

Answer 832

When a licensed person or entity is accused of any act, omission, or misconduct, the licensee, with consent of Commission, may surrender the license.

Answer 833

This applies to a person who engages in real estate activity without a license or during a period when the person's license is suspended, revoked, or expired.

Answer 834

Reasonable conditions, restrictions, and limitations may be imposed upon the license, registration, or approval issued to the disciplined person or entity.

Answer 835

A license may be suspended or revoked for the following reasons: If license is obtained by false or fraudulent misrepresentation (Examples: Obtaining license by falsifying documents, failing to disclose criminal convictions) Conviction or plea of guilty/no contest for offense of embezzlement, fraud or conspiracy to defraud, forgery, or obtaining money by false pretenses, and any offense involving moral turpitude Violation of license law while personally selling, leasing, or buying broker's own real property Violation of license law by a broker's unlicensed employee Acting for more than one party in a transaction without consent of all parties (undisclosed dual agency) Paying consideration to any person in violation of the law Paying fees to an unlicensed person other than a party to the transaction (may pay referral fees to other active licensees within the state). Fees to out-of-state licensee are acceptable, but the out-of-state licensee is not allowed to set foot in the state because the out-of-state licensee would then be considered an unlicensed North Carolina broker.

Answer 836

Time share developers must obtain a certificate of registration from the North Carolina Real Estate Commission. Offering or selling time shares before registering the project with the Commission is a felony. Persons selling time shares must have an active real estate brokers license. A time share project must have a project broker. Project brokers must be actively licensed and designated to supervise all licensees. The time share registrar is designated by the developer and is responsible for the recordation of the timeshare instruments as well as the release of liens. No sales or offers to sell shall be made until the registrar is designated. Owners have the right to occupy units during five or more intervals over a period of at least five years, including renewal options. A developer must give the purchaser a copy of the public offering statement before accepting an offer (entering into a contract). In the time share public offering statement, the developer must disclose all financial obligations. A developer is not required to disclose the number of time shares sold or number available for sale. A developer who is not providing the buyer with an public offering statement may be obligated to pay the buyer 10% of the sales price (not more than $3,000). The purchaser has the right to cancel in writing within five calendar days after execution of the contract. Earnest money should be deposited in trust or escrow account immediately. Earnest money is held in escrow for 10 days or until cancellation by the buyer, whichever occurs first. A licensee selling time shares that does not meet the requirements of the act is violating license law and can be disciplined by the NCREC. Penalties imposed on developers are enforced by the North Carolina Real Estate Commission. A time share developer who is not in compliance may be disciplined and fined $500 for each violation; a time share developer is the only party that the Commission can fine. The certificate of registration for the time share project may be suspended or revoked by the NCREC. Time share records must be retained for three years. The project broker and developer must comply with all time share agency agreements and disclosures rules.

Answer 837

Trust money is all money belonging to others in a real estate transaction received by a broker acting in a fiduciary capacity. The most common examples are the following: Earnest money deposits Tenant security deposits Rents Property owner's association and homeowners association dues and assessments

Answer 838

Basic required features of trust account are that they are separate, custodial, and available on demand. A trust account must be a demand deposit account in a federally-insured depository institution lawfully doing business in North Carolina that agrees to make the account records available for inspection by the NCREC. The bank can be located outside of North Carolina as long as all other conditions are met.

Answer 839

The words "trust account" or "escrow account" must appear on all signature cards, bank statements, deposit tickets, and checks. All deposits must be insured by the FDIC.

Answer 840

Only one trust account is required. The account can hold all types of trust funds – commercial, residential, and property management). It is generally helpful to maintain more than one account. Brokers who handle homeowner or property owner association funds must maintain a separate trust account for each POA or HOA

Answer 841

Commingling is prohibited. There is a limited exception to the commingling prohibition to cover bank service charges on trust accounts. Interest-bearing trust accounts are allowed as long as the broker first obtains written authorization from all parties.

Answer 842

The BIC may transfer possession of trust money to a bookkeeper, secretary, or some other clerical employee to record and deposit the funds in a trust account and to maintain trust account records. The BIC remains responsible for the care and custody of the funds. The BIC can transfer earnest money deposits from his/her trust account to a settlement agent not more than 10 days prior to the anticipated settlement date. These funds can not be disbursed for any other purpose without the written consent of the parties .

Answer 843

The broker retains trust money in trust account until the broker obtains a written release from the parties consenting to its disposition or until disbursement is ordered by a court. With proper notice to the parties, disputed or abandoned trust money can be transferred to the Clerk of Court in the county where the property is located.

Answer 844

Deposit of trust money in a trust account must occure within three banking days following receipt. Exceptions to this basic deposit rule include the following: Earnest money or tenant security deposits paid by other than currency must be deposited in trust account within three banking days following acceptance of offer or lease EMD or TSD paid in CASH must be deposited within 3 banking days of receipt, even if the contract or lease has not been accepted Broker not required to wait for contract or lease acceptance – may choose to immediately deposit Trust money received by provisional broker (PB) must be delivered upon receipt to the supervising broker with whom PB is affiliated Trust money received by a limited nonresident commercial broker must be delivered immediately to and held by the resident NC broker with whom the nonresident is affiliated A broker may accept custody of a check or other negotiable instrument payable to seller for an option or due diligence fee but only for the purpose of delivering to the seller Cash must be immediately deposited in trust account pending contract formation Check or other negotiable instrument payable to third-party escrow agent in sales transaction for trust monies

Answer 845

The general responsibility of licensees is to safeguard trust monies and follow prohibitions against misuse of trust monies. For more information on handling and accounting for trust money, see Commission Rule A.116(a)-(g) and Commission Rule A.117(b) and (c)(4)(B).