Sample Test: Maryland Practice Exam

Question 1

A farmer temporarily installs produce coolers in a leased farm stand in order to prevent spoilage. The coolers would be considered which of the following?

a. Trade fixtures that are real property.
b. Trade fixtures that are personal property.
c. Temporary real property.
d. Emblements.

Answer 1

(b) Trade fixtures that are personal property.

Trade fixtures are items of a tenant’s personal property that the tenant has temporarily affixed to a landlord’s real property in order to conduct business. Trade fixtures may be detached and removed before or upon surrender of the leased premises. Should the tenant fail to remove a trade fixture, it may become the property of the landlord through accession. Thereafter, the fixture is considered real property.

Question 2

Property can be converted from real to personal property and from personal property to real property by means of which processes, respectively?

a. Assemblage and plottage.
b. Application and dissolution.
c. Severance and affixing.
d. Planting and harvesting.

Answer 2

(c) Severance and affixing.

Severance is the conversion of real property to personal property by detaching it from the real estate; affixing, or attachment, is the act of converting personal property to real property by attaching it to the real estate, such as by assembling a pile of bricks into a barbecue pit, or constructing a boat dock from wood
planks.

Question 3

The highest form of ownership interest one can acquire in real estate is the

a. legal life estate.
b. conventional life estate.
c. defeasible fee simple estate.
d. absolute fee simple estate.

Answer 3

(d) absolute fee simple estate.

The fee simple freehold estate is the highest form of ownership interest one can acquire in real estate. It includes the complete bundle of rights, and the tenancy is unlimited, with certain exceptions. The fee simple absolute estate is a perpetual estate that is not conditioned by stipulated or restricted uses.

Question 4

The distinguishing feature of a defeasible fee simple estate is that

a. it can be passed on to heirs.
b. it has no restrictions on use.
c. the estate may revert to a grantor or heirs if the prescribed use changes.
d. it is of unlimited duration.

Answer 4

(c) the estate may revert to a grantor or heirs if the prescribed use changes.

The defeasible fee estate is perpetual, provided the usage conforms to stated conditions. Essential
characteristics are: the property must be used for a certain purpose or under certain conditions; and, if the use changes or if prohibited conditions are present, the estate reverts to the previous grantor of the estate.

Question 5

Maria acquires a property from her uncle Alfonso. When Maria dies, the estate will pass to Alfonso’s other niece, Serena. The type of estate that Maria has in the property is a

a. conventional life estate.
b. legal life estate.
c. fee simple defeasible estate.
d. tenancy by the entireties.

Answer 5

(a) conventional life estate.

A conventional life estate is a freehold estate that is limited in duration to the life of the owner or other
named person. Upon the death of the owner or other named individual, the estate passes to the original owner or another named party. A legal life estate is created by law as opposed to a property owner’s choice.

Question 6

One difference between a cooperative estate and a condominium estate is that

a. a condominium owner owns a unit of air space whereas the co-op owner owns a proprietary lease.
b. a condominium sale adversely affects other unit owners.
c. the coop owner owns stock and a freehold real estate interest whereas the condominium owner simply a proprietary lease.
d. the condominium owner owns the common elements and the airspace whereas the coop owner only owns the apartment.

Answer 6

(a) a condominium owner owns a unit of air space whereas the co-op owner owns a proprietary
lease.

The owner of a condominium has a fee-simple ownership interest in his/her unit and its air space.
Whereas, a co-op owner has a leasehold, not fee-simple, interest with the property’s corporation.

Since the corporation owns an undivided interest in the cooperative property, debts and financial obligations apply to the property as a whole, not to individual units as in a condominium.

Question 7

Who are the essential parties involved in an estate in trust?

a. Owner, trustor and lawyer.
b. Owner, trustor and trustee.
c. Trustee, title company, and beneficiary.
d. Trustor, trustee and beneficiary.

Answer 7

(d) Trustor, trustee and beneficiary.

In an estate in trust, a fee owner– the grantor or trustor– transfers legal title to a fiduciary– the trustee– who holds and manages the estate for the benefit of another party, the beneficiary.

Question 8

A condominium owner enjoys a

a. share in an association that owns one’s apartment.
b. tenancy in common interest in airspace and common areas of the property.
c. fee simple ownership of the airspace in a unit and an undivided share of the entire property’s common areas.
d. fee simple ownership of a pro rata share of the entire property.

Answer 8

(c) fee simple ownership of the airspace in a unit and an undivided share of the entire property’s common areas.

A condominium is a hybrid form of ownership of multi-unit residential or commercial properties. It combines ownership of a fee simple interest in the airspace within a unit with ownership of an undivided share, as a tenant in common, of the entire property’s common elements, such as lobbies, swimming pools, and hallways.

Question 9

With various types of junior liens, the order of payment priority is generally established according to

a. the date of recordation.
b. what form of tax is in question.
c. the order of disbursement.
d. whether the lien was subordinated.

Answer 9

(a) the date of recordation.

Among junior liens, date of recording determines priority. The rule is: the earlier the recording date of the lien, the higher its priority. For example, if a judgment lien is recorded against a property on Friday, and a mortgage lien is recorded on the following Tuesday, the judgment lien has priority and must be satisfied in a foreclosure ahead of the mortgage lien.

Question 10

What is a lien-theory state in contrast to a title-theory state?

a. A state in which liens are given priority over other encumbrances.
b. A state in which a mortgagor retains title to the property when a mortgage lien is created.
c. A state in which the holder of a mortgage lien receives title to the mortgaged property until the debt is satisfied.
d. A state in which liens must be recorded to be enforceable.

Answer 10

(b) A state in which a mortgagor retains title to the property when a mortgage lien is created.

In lien-theory states, laws give a lender on a mortgaged property equitable title rather than legal title. The mortgagor in a lien theory state retains legal title.

Question 11

A property owner has an easement appurtenant on her property. One day the property is sold to another party who is opposed to the easement. Following the closing, this particular form of easement

a. terminates.
b. transfers with the property.
c. transfers with the owner to a new property.
d. becomes a license on the property.

Answer 11

(b) transfers with the property.

The term appurtenant means “attaching to.” An easement appurtenant attaches to the estate and transfers with it unless specifically stated otherwise in the transaction documents.

Question 12

What fundamental legal purpose is fulfilled by title records?

a. Keeping the county apprised of tax payments.
b. Preventing identity theft.
c. Giving constructive notice of one’s rights and interests in the property.
d. Assembling all relevant documents in a single place.

Answer 12

(c) Giving constructive notice of one’s rights and interests in the property.

Recorded instruments may include deeds, mortgages, liens, easements, sale contracts, and marriage, probate and tax records. The primary purpose of recording and maintaining records of these instruments is to provide constructive notice of the conditions of a property’s title– who owns it, who maintains claims against it.

Question 13

What is “chain of title?”

a. The list of all parties who have ever owned real estate.
b. The bundle of rights linked to the recorded title to a parcel.
c. A chronology of successive owners of record of a parcel of real estate.
d. Involuntary conveyance of title by statutory rules of descent.

Answer 13

(c) A chronology of successive owners of record of a parcel of real estate.

Chain of title refers to the succession of owners of record dating back to the original grant of title from the state to a private party. It is thus more than a mere list; it is a chronological list as reflected in title records.

Question 14

Which of the following provides the strongest evidence of marketable title?

a. A general warranty deed.
b. A title certificate.
c. Title insurance.
d. An attorney’s opinion.

Answer 14

(c) Title insurance.

A title insurance policy indemnifies the policy holder against losses arising from defects in the title and is thus generally accepted as the best evidence of marketability after a Torrens certificate, which is not available in every jurisdiction. A signed deed is no evidence of marketability, only of an intent to convey title. An attorney’s opinion and a title certificate, while forms of evidence of marketability, do not guarantee clear title or offer any protection against a defective title.

Question 15

A store owner enters into a lease that charges rent per square foot, a common area fee, and a portion of the store owner’s gross income from the property. This kind of lease is a

a. triple charge, or triple net lease.
b. proprietor’s lease.
c. percentage lease.
d. retailer’s gross lease.

Answer 15

(c) percentage lease

A percentage lease allows the landlord to share in the income generated from the use of the property. A tenant pays percentage rent, or an amount of rent equal to a percentage of the
tenant’s periodic gross sales.

Question 16

An owner leases a property to a business in exchange for rent. The tenant is required to pay all operating expenses as well. This is an example of a

a. proprietary lease.
b. percentage lease.
c. gross lease.
d. net lease.

Answer 16

(d) net lease.

A net lease requires a tenant to pay for utilities, internal repairs, and a proportionate share of taxes, insurance, and operating expenses in addition to rent.

Question 17

A lease automatically terminates under which of the following circumstances?

a. The tenant fails to pay rent.
b. The leased property is foreclosed.
c. The tenant goes out of business.
d. The landlord cancels the lease.

Answer 17

(b) The leased property is foreclosed.

A foreclosure extinguishes all prior interests in a property, including a leasehold.

Question 18

A county or municipal authority usually grants a certificate of occupancy for new construction only after

a. all contractors’ work has been inspected.
b. all work has been completed for at least sixty days.
c. the construction conforms to building codes.
d. the tax assessor has valued the improvement.

Answer 18

(c) the construction conforms with applicable building codes.

Building inspectors inspect a new development or improvement for code compliance. If the work complies, the municipality or county issues a certificate of occupancy which officially clears the property for occupation and use.

Question 19

A property owner is precluded by deed restriction from developing a thirty foot boat dock. The limitation prompts the owner to sell to another party. The new owner

a. is free to build the dock since the next door neighbor built a similar dock two weeks later.
b. takes title subject to the same restriction.
c. can build the dock with special permission from the zoning board.
d. may build, since the restriction is extinguished by the sale.

Answer 19

(b) takes title subject to the same restriction.

Deed restrictions attach to the title of the property. Therefore, the restriction passes to the new buyer.

Question 20

Emily sells Rycole a property containing a deed condition. The condition stipulates that the forested portion of the property must never be razed for development. Three months later, Rycole proceeds to harvest the trees and turn the area into an executive golf course. What recourse, if any, does Emily have under the deed condition?

a. She has the right to re-possess the property because the grantee has violated the condition.
b. The condition has ceased to apply because she allowed the violation to continue for a certain period of time.
c. She can claim the proceeds from the harvested trees.
d. She can force Rycole to sell the property to a new owner who agrees to comply with the condition.

Answer 20

(a) She has the right to re-possess the property because the grantee has violated the condition.

A deed condition may restrict certain uses of a property, much like a deed restriction. However, violation of a deed condition gives the grantor the right to re-take possession of the property and file suit for legal title.

Question 21

What is the essential purpose of legal descriptions of real property?

a. To create a consistent, unchanging standard for uniquely locating a property.
b. To enable courts and attorneys to calculate property size accurately.
c. To comply with common law for real property.
d. To eliminate cumbersome metes and bounds descriptions.

Answer 21

(a) To create a consistent, unchanging standard for identifying a property’s unique location.

A legal description of real property is one which accurately locates and identifies the boundaries of the subject parcel to a degree acceptable by courts of law in the state where the property is located. The general criterion for a legal description is that it alone provides sufficient data for a surveyor to locate the parcel. A legal description identifies the property as unique and distinct from all other properties.

Question 22

Which of the following characterizes metes and bounds descriptions?

a. They use meridians and base lines.
b. They identify an enclosed area, beginning and ending at the same point.
c. They use lot and block numbers.
d. They incorporate elevation into the descriptions.

Answer 22

(b) They identify an enclosed area, beginning and ending at the same point.

The metes and bounds description always identifies an enclosed area by starting at an origination point, called point of beginning, or POB, and returning to the POB at the end of the description.

Question 23

A buyer agrees to all terms of a seller’s offer except the length of time for a contingency to procure financing. The buyer extends the financing period in the offer by one week, signs the form, and mails it back to the seller. At this point, the seller’s offer

a. is void.
b. becomes an executory contract.
c. becomes a counteroffer.
d. has been accepted, since the modification was a contingency.

Answer 23

(a) is void.

By changing any of the terms of an offer, the offeree creates a counteroffer, and the original offer is void. At this point, the offeree becomes the offeror, and the new offeree gains the right of acceptance. If accepted, the counteroffer becomes a valid contract provided all other requirements are met.

Question 24

Real estate contracts that are not personal service contracts

a. may be assigned.
b. are not assignable.
c. must be in writing.
d. are exempt from the statute of frauds.

Answer 24

(a) may be assigned.

A real estate contract that is not a personal contract for services can be assigned to another party unless the terms of the agreement specifically prohibit assignment. Listing agreements, for example, are not
assignable, since they are personal service agreements between agent and principal. Sales contracts, however, are assignable, because they involve the purchase of real property rather than a personal service.

Question 25

Which of the following contracts must be in writing to be enforceable? a. A parol contract. b. A six-month lease. c. A two-year lease. d. An executory contract.

Answer 25

(c) A two-year lease. A contract may be in writing or it may be an oral, or parol, contract. Certain oral contracts are valid and enforceable, others are not enforceable, even if valid. For example, most states require listing agreements, sales contracts, and leases exceeding one year to be in writing to be enforceable.

Question 26

Agent Bob, who works for Broker Bill, obtains an owner listing to lease a building. Bill's other agent, Sue, locates a tenant for Bob's listing. Broker Bill in this instance is a. an implied agent. b. a dual agent. c. a single agent. d. a subagent.

Answer 26

(b) a dual agent. Dual agency occurs whenever a single broker represents both principal parties to a transaction. Here, since Bob and Sue work for Bill, Bill is the dual agent.

Question 27

A transaction broker should disclose his or her agency relationship to prospective buyers and sellers a. upon first substantive communication. b. upon completion of the listing agreement. c. immediately following completion of any offer. d. immediately prior to closing.

Answer 27

(a) upon first substantive communication. The agent must provide written notice to all parties or their agents as soon as substantive communication occurs, which can include initial face-to-face contact.

Question 28

A transaction facilitator in a residential transaction represents a. the seller. b. the buyer. c. both seller and buyer. d. neither seller nor buyer.

Answer 28

(d) neither seller nor buyer. In recent years, the brokerage industry has striven to clear up the question of who works for whom, and who owes fiduciary duties to whom. One solution allows a broker to represent no one in a transaction. That is, the broker acts as a transaction broker, or facilitator, and has no allegiance to buyer or seller.

Question 29

A principal instructs an agent to inform minority buyers that the property for lease was just leased an hour ago and is no longer available. The agent refuses to comply. In this case, a. the agent should exercise caution until the listing expires, then decline to renew it. b. the principal has proposed an illegal act, which should not be obeyed. c. the agent is liable for breaching the listing terms. d. the agent may sue the principal for discrimination and misrepresentation.

Answer 29

(b) the principal has proposed an illegal act, which should not be obeyed. An agent must comply with the client's directions and instructions, provided they are legal. If the directive is illegal, the agent must also immediately withdraw.

Question 30

The amount of a real estate broker's commission is established by a. agreement among competing brokers. b. negotiation with clients. c. the local Board of Realtors®. d. state real estate license law.

Answer 30

(b) negotiated with clients. The amount of a broker's commission is whatever amount the client and broker have agreed to.

Question 31

A client revokes an exclusive right-to-sell listing two months prior to expiration. The reason stated: the client is too busy to meet with the agent. In this case, a. the client is criminally liable for negligence. b. the client may be liable for a commission and marketing expenses. c. the agent can sue the client for specific performance, even if no customer had been located. d. the agent must accept the revocation without the possibility of damage recovery.

Answer 31

(b) the client may be liable for a commission and marketing expenses. With an exclusive right-to-sell listing, if the property sells during the term of the revoked listing, the client is liable for the commission. If the property does not sell, the client is liable for the broker's actual costs.

Question 32

A protection period clause in an exclusive listing provides that a. the owner is protected from all liabilities arising from the agent's actions performed within the agent's scope of duties. b. the agent has a claim to a commission if the owner sells or leases to a party within a certain time following the listing's expiration. c. agents are entitled to extend a listing agreement's term if a transaction is imminent. d. an owner is not liable for a commission if a prospective customer delays in completing an acceptable offer.

Answer 32

(b) the agent has a claim to a commission if the owner sells or leases to a party within a certain time following the listing's expiration. Many listings include a protection clause stating that, for a certain period after expiration, the owner is liable for the commission if the property sells to a party that the broker procured, unless the seller has since listed the property with another broker.

Question 33

Real estate advertising must conform to regulatory standards and requirements. One requirement is a. a broker may only place blind ads in social media outlets. b. a broker must have all advertising approved by the local real estate board. c. the advertising must not be deceptive. d. sales agents may only advertise in their own name.

Answer 33

(c) the advertising must not be deceptive. Advertising may not be misleading or deceptive in promoting the brokerage or listed properties. Blind ads are also prohibited without exception. Sales agents, moreover, must identify their employer.

Question 34

The three principal brokerage firms in a market agree to pay sales agents 15% more than any other competitor currently in practice. This is an example of a. collusion. b. price fixing. c. allocation of markets. d. steering.

Answer 34

(a) collusion. Collusion is the illegal practice of two or more businesses joining forces or making joint decisions which have the effect of putting another business at a competitive disadvantage.

Question 35

Two leading agencies jointly agree to raise commissions charged to residential sellers to 7.5% of the sales price. Which of the following is true? a. This is a perfectly legitimate business practice. b. The brokers have illegally fixed prices. c. The brokers have allocated markets. d. The brokers have engaged in legal collusion.

Answer 35

(b) The brokers have illegally fixed prices. Price fixing is the practice of two or more brokers agreeing to charge certain commission rates or fees for their services, regardless of market conditions or competitors.

Question 36

A sale contract contains an open-ended financing contingency: if the buyer cannot obtain financing within a reasonable time, the deal is off. Six months later, the buyer still cannot secure financing. Which of the following is true? a. The seller may cancel the contract, since it can be ruled invalid. b. The buyer can continue indefinitely to seek financing, and the seller's property must remain off the market, since “reasonable” is not defined. c. The escrow agent is entitled to the buyer's deposit. d. The seller can force a lender to commit to a loan under fair financing laws.

Answer 36

(a) The seller may cancel the contract, since it can be ruled invalid. A contingency that is too broad, vague, or excessive in duration may invalidate the entire contract on the grounds of insufficiency of mutual agreement. To avoid problems, the statement of a contingency should be explicit and clear, have an expiration date, and expressly require diligence in the effort to fulfill the requirement.

Question 37

In the event of a buyer's default, a provision for liquidated damages in a sale contract enables a seller to a. sue the buyer for specific performance. b. force the buyer to quitclaim equitable title. c. sue the buyer for the broker's marketing expenses. d. claim the deposit as compensated damages for the buyer's failure to perform.

Answer 37

(d) claim the deposit as compensated damages for the buyer's failure to perform. If a buyer fails to perform under the terms of a sale contract, the breach entitles the seller to legal recourse for damages. The usual remedy is forfeiture of the buyer's deposit as liquidated damages, provided the deposit is not grossly in excess of the seller's actual damages.

Question 38

Which of the following is true of an option-to-buy agreement? a. The potential buyer, the optionee, is obligated to buy the property once the option agreement is completed. b. The optionor must perform if the optionee takes the option, but the optionee is under no obligation to do so. c. The contract can be executed at no cost to the optionee. d. It is a bilateral agreement.

Answer 38

(b) The optionor must perform if the optionee takes the option, but the optionee is under no obligation to do so. An option-to-buy places the optionee under no obligation to purchase the property. However, the seller must perform under the terms of the contract if the buyer exercises the option. An option is thus a unilateral agreement. Exercise of the option creates a bilateral sale contract where both parties are bound to perform.

Question 39

If a manufacturer that is the major employer in a small city moves its operations to another city, it is reasonable to expect a. a fall in housing demand, but no other changes in the real estate market. b. a decline in demand for all types of real estate in the real estate market. c. an immediate fall in the demand for industrial real estate, but no other changes in the real estate market. d. an immediate decline in the prices for industrial and office real estate, but no impact on the residential market.

Answer 39

(b) a decline in demand for all types of real estate in the real estate market. Businesses that support the departing company will lay off or fire new employees, causing some to leave town in search of work. Some of these businesses may also have to cease operations. Hence the demand for residential real estate, as well as for commercial and industrial, will decline, and new construction will probably also halt until some other factor increases demand again.

Question 40

If a commercial real estate market is undersupplied, it is likely that a. rental prices in that market will fall. b. rental prices in that market will rise. c. rental prices will remain stable until equilibrium is reached. d. construction will increase to the point of equilibrium.

Answer 40

(b). rental prices in that market will rise An undersupply of commercial properties in relation to demand will most likely increase prices, as renters have fewer choices and less bargaining power.

Question 41

The amount of available property that becomes occupied over a period of time is called a. vacancy. b. absorption. c. equilibrium. d. occupation.

Answer 41

(b) absorption. Absorption is the amount of available property that becomes occupied over a period of time, usually measured in square feet.

Question 42

The roof of a property cost $20,000. The economic life of the roof is 20 years. Assuming the straight-line method of depreciation, what is the depreciated value of the roof after 3 years? a. $20,000. b. $17,000. c. $14,000. d. $3,000.

Answer 42

(b) $17,000. First derive the annual depreciation, which is the cost divided by the economic life. Then multiply annual depreciation times the number of years to identify total depreciation. Remember to subtract depreciation from the original cost if the question asks for the ending value. Thus, ($20,000 ÷ 20 years x 3 years) = $3,000 total depreciation. The ending value is $20,000 – 3,000, or $17,000.

Question 43

The income capitalization approach to appraising value is most applicable for which of the following property types? a. Single family homes. b. Apartment buildings. c. Undeveloped land. d. Churches.

Answer 43

(b) Apartment buildings. The income capitalization approach, or income approach, is used for income properties and sometimes for other properties in a rental market where the appraiser can find rental data. The approach is based on the principle of anticipation: the expected future income stream of a property underlies what an investor will pay for the property.

Question 44

In the income capitalization approach, an appraiser a. estimates gross income and multiplies times the gross income multiplier. b. estimates effective income, subtracts tax, and applies a capitalization rate. c. estimates net income and applies a capitalization rate to it. d. estimates potential income and applies a capitalization rate to it.

Answer 44

(c) estimates net income and applies a capitalization rate to it. The steps are: estimate potential gross income; estimate effective gross income (potential minus vacancy and credit losses); estimate net operating income (effective minus total operating expenses); select a capitalization rate; and apply the capitalization rate. Use the formula: income ÷ cap rate = value.

Question 45

Net operating income is equal to a. potential income minus expenses minus debt service. b. effective gross income minus potential income. c. potential gross income minus vacancy and credit loss minus expenses. d. effective gross income minus vacancy and credit loss.

Answer 45

(c) potential gross income minus vacancy and credit loss minus expenses. Net operating income, or NOI, is always income after vacancy, credit loss and expenses. It does not, however, include debt service.

Question 46

If net income on a property is $40,000 and the cap rate is 10%, the value of the property using the income capitalization method is a. $100,000. b. $400,000. c. $1,000,000. d. $4,000,000.

Answer 46

(b) $400,000. Value = Income ÷ Cap rate. Thus, V= $40,000 ÷ .10 = $400,000.

Question 47

The key feature of an adjustable mortgage loan is that a. the interest rate may vary. b. the monthly payment increases over the life of the loan. c. the principal balance does not amortize. d. the loan term can be shortened or lengthened.

Answer 47

(a) the interest rate may vary. Adjustable rate mortgages (ARMs) allow the lender to change the interest rate at specified intervals and by a specified amount. Federal regulations place limits on incremental interest rate increases and on the total amount by which the rate may be increased over the loan term.

Question 48

Why is a wraparound mortgage loan potentially interesting to a home seller as an investment? a. It is a senior loan that can be easily subordinated for additional debt. b. A wraparound lender can profit when the interest rate of the wraparound exceeds that of the underlying mortgage. c. The underlying loan is retired early. d. The second mortgage borrower may make payments directly to the first mortgage lender.

Answer 48

(b) A wraparound lender can profit when the interest rate of the wraparound exceeds that of the underlying mortgage. In a wraparound loan arrangement, the seller receives a junior mortgage from the buyer, and uses the buyer's payments to make the payments on the original first mortgage. This potentially enables the seller to profit from any difference between a lower interest rate on the senior loan and a higher rate on the wraparound loan.

Question 49

A builder is required to secure a loan with mortgages on three properties. This is an example of a. a participation mortgage loan. b. a blanket mortgage loan. c. a permanent mortgage loan. d. a bridge loan.

Answer 49

(b) a blanket mortgage loan. A blanket mortgage is secured by more than one property, such as multiple parcels of real estate in a development.

Question 50

Which of the following is true of a loan with negative amortization? a. The interest rate on the loan increases as the principal balance decreases. b. Payments are not sufficient to retire the loan. c. The loan balance is diminishing, or going negative. d. Additional interest is being added to the monthly payment.

Answer 50

(b) Payments are not sufficient to retire the loan. Negative amortization causes the loan balance to increase over the term. This occurs if the borrower's periodic payment is insufficient to cover the interest owed for the period. The lender adds the amount of unpaid interest to the borrower's loan balance.

Question 51

The loan-to-value ratio is used as an underwriting mechanism because a. the LTV determines the profitability of the loan. b. the loan amount needs to be less than the property's value. c. borrowers tend to inflate the true value of the property. d. a full-price loan overfinances the borrower.

Answer 51

(b) the loan amount needs to be less than the property's value. Lenders must have a margin of borrower equity to protect against falling real estate values which increase the risk of the loan. Without this margin, a lender can incur a loan loss in a foreclosure sale since the proceeds may be less than the loan amount.

Question 52

In the past, borrowers were often surprised by unexpected or undisclosed borrowing fees and expenses at closing. This phenomenon has been largely corrected through disclosure requirements mandated by which of the following laws? a. Equal Credit Opportunity Act b. Truth-in-Lending laws c. National Disclosure Procedures Act d. Federal Fair Housing Laws

Answer 52

(b) Truth-in-Lending laws Truth-in-Lending Laws, implemented by the Federal Reserve's Regulation Z, regulate the disclosure of costs, the right to rescind the credit transaction, advertising credit offers, and penalties for non-compliance with the act.

Question 53

Which of the following is an important function of the secondary mortgage market? a. Participants borrow funds from banks so the banks can make more loans. b. Participants issue tax certificates and sell them to primary lenders. c. Participants purchase pools of defaulted loans from lenders to keep them solvent. d. Participants sell mortgage-backed securities in order to buy pools of loans.

Answer 53

(d) Participants sell mortgage-backed securities in order to buy pools of loans. Secondary mortgage market organizations buy pools of mortgages from primary lenders and sell securities backed by these pooled mortgages to investors. By selling securities, the secondary market brings investor money into the mortgage market. By purchasing loans from primary lenders, the secondary market returns funds to the primary lenders, thereby enabling the primary lender to originate more mortgage loans.

Question 54

Cash flow is a measure of how much pre-tax or after-tax cash an investment property generates. To derive cash flow it is therefore necessary to exclude a. cost recovery expense. b. interest expense. c. loan principal payments. d. net operating income.

Answer 54

(a) cost recovery expense. Cash flow is the difference between the amount of actual cash flowing into the investment as revenue and out of the investment for expenses, debt service, and all other items. Cash flow concerns cash items only, and therefore excludes depreciation (cost recovery), which is not a cash expense.

Question 55

The method for deriving an investor’s return on investment, or ROI, is by a. dividing net operating income by cash flow. b. multiplying the required yield times after-tax cash flow. c. dividing net income by the price paid for the property. d. multiplying cash flow times the price paid for the property.

Answer 55

(c) dividing net income by the price paid for the property. The investment return measure known as return on investment (ROI) is calculated by dividing net income by the value of the investment. This yields a rate of return on investment.

Question 56

Which of the following items would affect a homeowner's adjusted basis? a. Installing a higher capacity air conditioning and purifying system. b. Replacing a washing machine. c. Stripping and staining hardwood floors. d. Replacing a broken picture window.

Answer 56

(a) Installing a higher capacity air conditioning and purifying system. Basis is increased by the cost of capital improvements made to the property. Examples of capital improvements are: putting on an addition, paving a driveway, replacing a roof, adding central air conditioning, and rewiring the home. Repairs, maintenance, and redecorating are not generally considered capital improvements.

Question 57

Which of the following is true with respect to real property taxation by the federal government? a. It imposes ad valorem property taxes and capital gain tax. b. It may not impose property taxes or tax liens. c. There are no federal ad valorem taxes on real property. d. It imposes ad valorem tax, but not capital gain tax.

Answer 57

(c) There are no federal ad valorem taxes on real property. There are no federal taxes on real property. The Constitution of the United States specifically prohibits such taxes. The federal government does, however, tax income derived from real property and gains realized on the sale of real property.

Question 58

Ad valorem taxes are based on a. the replacement value of property. b. the assessed value of property. c. the millage value of property. d. the broker's estimate of value.

Answer 58

(b) the assessed value of property. General property taxes are levied on an ad valorem basis, meaning that they are based on the assessed value of the property. Assessed value is determined according to state law, usually by a county or township assessor or appraiser.

Question 59

A retirement facility prohibits ownership of any unit by persons under 55 years of age. The association claims it has made the prohibition properly. Which of the following is true? a. They are violating the Civil Rights Act of 1866. b. They are violating the Fair Housing Amendments Act of 1988. c. They are guilty of age discrimination. d. The prohibition may be legal if performed correctly.

Answer 59

(d) The prohibition may be legal if performed correctly. The condominium association may be exempt from fair housing prohibitions against age discrimination if it is established as a retirement community in which 80 % of the dwellings have one person who is 55 years of age or older and it has amenities for elderly residents.

Question 60

An agent receives a full-price offer from a minority party. The agent presents the offer to the seller and discloses the buyer’s minority status. The seller at that point instructs the agent to inform the buyer that the property has just gone under contract. The agent duly complies, telling the offeror that the home has just been temporarily removed from the market and is unavailable – but may be available soon if the contract falls through. Which party or parties, if any, have violated fair housing laws? a. The agent only. b. The owner only. c. The agent and the owner. d. Neither agent nor owner.

Answer 60

(c) The agent and the owner. The owner has illegally discriminated, and the agent, by going along with the owner, is equally guilty of violating fair housing laws.

Question 61

Which of the following are examples of closing items not prorated between buyer and seller? a. Taxes. b. Inspection fees. c. Utilities. d. Condominium assessments.

Answer 61

(b) Inspection fees. Prorated items are expenses that both parties must share. Non-prorated items are one-time individual charges such as sale commissions, recording fees, and title insurance.

Question 62

Which of the following activities is not allowed under the Real Estate Settlements and Procedures Act? a. A broker having any business relationship with an insurance company that is involved in the broker's transaction. b. A broker pre-qualifying a buyer for a mortgage loan. c. A lender requiring a deposit from a borrower for a tax and insurance escrow account. d. A lender paying a fee to a broker for referring a borrower to the lender.

Answer 62

(d) A lender paying a fee to a broker for referring a borrower to the lender. RESPA prohibits the payment of fees as part of a real estate settlement when no services are actually rendered. This prohibition includes referral fees for such services as title searches, title insurance, mortgage loans, appraisals, credit reports, inspections, surveys, and legal services.

Question 63

Which of the following communication records must (as opposed to should) be kept? a. Notes on every conversation. b. Copies of required communications to principals. c. Notes from company training sessions. d. Business cards of licensees one meets at open houses.

Answer 63

(b) Copies of required communications to principals. Some communications with transaction parties are good and necessary for business. Others are required by law, and records of them must be maintained for a statutory period. Required records typically include listing agreements, offers, contracts, closing statements, agency agreements, disclosure documents, correspondence and other communication records, notes and any other relevant information.

Question 64

To minimize the risk of violating fair housing laws, a licensee should a. refuse to use terms that refer to or describe any of the classes of persons protected by the laws. b. avoid working in neighborhoods that are predominantly occupied by a single ethnic group. c. make discriminatory or derogatory remarks in conversation only, never in writing. d. give better service to members of a protected class than is standard for other clients or customers.

Answer 64

(a) refuse to use terms that refer to or describe any of the classes of persons protected by the laws. Before entering into a listing agreement, a licensee should explain that it is necessary to comply with fair housing laws and obtain the potential client’s acknowledgment and agreement. The agent should make it clear that the agent will reject the use of terms indicating race, religion, creed, color, national origin, sex, handicap, age or familial status to describe prospective buyers. Such terms should be avoided in conversation as well as in advertising.

Question 65

What are “tenant improvements?” a. Modifications to a rental suite to conform to a tenant’s usage specifications b. Marketing programs that yield a higher quality of tenant c. Increased revenue resulting from a rise in rental rates d. Increased occupancy resulting from a population increase in the market area

Answer 65

(a) Alterations to a rental space made to fit a particular tenant Alterations made specifically for certain tenants are called build-outs or tenant improvements. The work may involve merely painting and re-carpeting a rental space, or erecting new walls and installing special electrical or other systems.

Question 66

For the proper handling of client and owner monies, a property manager is generally required to a. deposit all funds every month in the management firm’s central operating account. b. employ a notary to witness and record every deposit or payment received. c. maintain a special trust account in a qualified financial depository. d. disburse all funds to their legal owners on a weekly basis.

Answer 66

(c) maintain a special trust account in a qualified financial depository. State laws and real estate commission rules specify how a property manager is to manage trust funds. In general, the agent is to maintain a separate bank account for these funds, with special accounting, in a qualified depository institution. The rules for how long an agent may hold trust funds before depositing them, and how the funds are to be disbursed, are spelled out. The fundamental requirements are that the owners of all funds must be identified, and there must be no commingling or conversion of client funds and agent funds.

Question 67

Jennifer advised her clients they needed to paint their living room before showing the property. The walls of these rooms were all 8’ high. The wall lengths were 14’, 18’, 16’, and 18’. If a gallon of paint covers 200 SF, how many whole gallons would the homesellers have to buy? a. 1 b. 2 c. 3 d. 6

Answer 67

(c) 3 The total area of the living room is (8’ x 14’ + 8’ x 18’ + 8’ x 16’ + 8’ x 18’) = 528 SF. They will therefore need 528 / 200 SF, or 3 whole gallons.

Question 68

An investor just purchased a rectangular 2-acre retail lot for $250 a frontage foot. If she paid $100,000 total, what was the depth of the lot? a. 400’ b. 250’ c. 871’ d. 218’

Answer 68

(d) 218’ Since the investor paid $100,000 total, and that equals $250 per frontage foot, there are 400 frontage feet (100,000 / 250). If the property is two acres, it totals 87,120 SF. Dividing this by 400 produces a lot depth of 217.8’.

Question 69

Andra can afford to spend $5,000 in closing costs to refinance her home. The lender quotes closing costs of $800 plus 2 points. The house appraised out at $240,000, and she can get an 80% loan. Can Annika afford to refinance? a. No, she is short by $64. b. No, she is short by $1,600. c. Yes, with $360 left over. d. Yes, she in fact breaks even.

Answer 69

(c) Yes with $360 left over. The loan she can get amounts to ($240,000 x 80%), or $192,000. The points charge is ($192,000 x .02), or $3,840. Total closing costs are then $3,840 + 800, or $4640. Thus she has $360 to spare.

Question 70

A lender offers an investor a maximum 70% LTV loan on the appraised value of a property. If the investor pays $230,000 for the property, and this is 15% more than the appraised value, how much will the investor have to pay as a down payment? a. $93,150 b. $79,350 c. $90,000 d. $69,000

Answer 70

(c) $90,000 First, the sale price is 115% of the appraised value, so the appraised value is $230,000 / 115%, or $200,000. The lender will lend $140,000 (70% of appraised value), so the investor will have to come up with $90,000 ($230,000 – 140,000).

Question 71

A house is being appraised using the sales comparison approach. The house has three bedrooms, two bathrooms, and a patio. The appraiser selects a comparable house that has three bedrooms, 2.5 bathrooms, and no patio. The comparable house just sold for $100,000. A half-bath is valued at $5,000, and a patio at $1,000. Assuming all else is equal, what is the adjusted value of the comparable? a. $100,000 b. $104,000 c. $96,000 d. $106,000

Answer 71

(c) $96,000. Since the comparable has an extra half-bath, it is adjusted downward to equalize with the subject. Conversely, since it has no patio, the appraiser adds value to the comparable. Thus, $100,000 minus $5,000 plus $1,000 equals $96,000.

Question 72

A family purchased a $90,000 lot to build a custom home. At the date of closing, the lot was assessed at $84,550 and the tax rate was $1.91 / $100 assessed valuation. When they completed the home, the assessment increased by $235,000 to include the new construction. If the monthly tax escrow is based on the assessed value, what will the monthly tax escrow be? a. $517 b. $6096 c. $508 d. $367

Answer 72

(c) $508 The total assessed value is ($84,550 + 235,000), or $319,550. The annual tax is based on ($319,550 / 100) = 3195.5 100's. Round up to 3196. To derive the annual tax, multiply 3,196 x 1.91, or $6,104.36. Divide this by 12 for the monthly escrow: ($6,104 / 12) = $508.

Question 73

The James family purchased a home for $180,000 five years ago and obtained an 80% LTV loan. Now the property has appreciated 25%. In addition, the loan has been paid down $11,000. What is the James’s current equity in the home? a. $47,000 b. $81,000 c. $45,000 d. $92,000

Answer 73

(d) $92,000 The formula for equity is (current value – indebtedness). The current value is ($180,000 + 25% x 180,000), or ($180,000 x 125%), or $225,000. The current debt is ($180,000 x 80%) - $11,000, or $133,000. Their equity is therefore $92,000.

Question 74

George and Mary have owned a rental house for 10 years. They bought it for $240,000 and estimated the land value @ 25%. If the property is depreciated on a 39-year schedule, and appreciation totals 50% over the period, what is their gain if they sell the property today? a. $159,230 b. $166,150 c. $181,538 d. $120,000

Answer 74

(b) $166,150 Use the formula: Gain = (Net selling price – adjusted basis) where adjusted basis = (beginning cost – depreciation). The selling price is $240,000 x 5% annual appreciation x 10 years, or ($240,000 + 50% x 240,000), or $360,000. Since land cannot be depreciated, the depreciable basis is ($240,000 total cost – 60,000 land value), or $180,000 (land = 25% total value). Annual depreciation = ($180,000 / 39 years), or $4,615. Thus total depreciation is ($4,615 x 10 years), or $46,150. The adjusted basis is therefore ($240,000 – 46,150), or $193,850. The total gain is therefore ($360,000 – 193,850), or $166,150.

Question 75

Adelpha’s home is valued at $250,000. She has insurance coverage of $160,000 with an 80% co-insurance clause. If Adelpha has a damage claim amounting to $100,000, how much will she receive from her policy? a. $32,000 b. $60,000 c. $80,000 d. $100,000

Answer 75

(c) $80,000 Applying the formula (percent of insurable property value carried / 80% replacement cost) x claim = recovery), divide the amount of coverage carried ($160,000) by 80% of the insurable property value ($250,000) to get the percent of the claim the company will pay (80%). Multiply this percentage by the claim amount to get $80,000, what the company will pay.

Question 76

Who serves as the Chairperson of the Maryland Real Estate Commission? a. Director of the Department of Labor b. Attorney General c. A Commissioner elected by the other Commissioners d. Whoever is appointed by the Governor

Answer 76

(c) A Commissioner elected by the other Commissioners The chairperson of the Maryland Real Estate Commission is elected by the Commissioners themselves.

Question 77

Real estate licenses in Maryland are issued by the a. Real Estate Commission. b. Department of Consumer Affairs. c. Division of Real Estate. d. Department of Real Estate.

Answer 77

(a) Real Estate Commission The Real Estate Commission issues licenses and administers and enforces the Real Estate Broker law.

Question 78

An investigation of alleged misconduct by a real estate licensee is conducted by the a. Attorney General. b. Real Estate Commission. c. local District Attorney’s office. d. Circuit court.

Answer 78

(b) Real Estate Commission. The Real Estate Commission has an investigative staff that investigates misconduct and complaints.

Question 79

Which of the following is NOT an enforcement power of the Real Estate Commission? a. Issuing a fine b. Suspending a license c. Revoking a license d. Order of incarceration

Answer 79

(d) Order of incarceration Although some of the offenses are subject to incarceration, only a court can order a violator to be imprisoned.

Question 80

Which of the following does NOT require a real estate license? a. Helping to locate property for purchase or rent b. Helping a close friend with a real estate transaction for a nominal fee c. Performing real estate brokerage services without compensation or the expectation of compensation d. Collecting rent for the use of any real estate

Answer 80

(c) Performing real estate brokerage services without compensation or the expectation of compensation Certain activities require a real estate license, but only if performed for compensation or the expectation of compensation.

Question 81

An applicant for a salesperson license requires at least a. an 8th grade diploma or the equivalent. b. a high school diploma or the equivalent. c. 60 hours of pre-license education. d. 90 hours of pre-license education.

Answer 81

(c) 60 hours of pre-license education. An education diploma is not required to obtain a salesperson license. There is a requirement to obtain 60 hours of pre-license education.

Question 82

The supervision of a branch office manager is a. only required for investment-related transactions. b. not required if the branch office has fewer than five agents. c. supplementary to the broker’s required duty of supervision. d. is fulfilled if the broker delegates that duty do a competent salesperson.

Answer 82

(c) supplementary to the broker’s required duty of supervision. A broker and a branch office manager both have a duty to provide reasonable and adequate supervision of licenses. The duty of the branch office manager to provide reasonable and adequate supervision is not in lieu of broker supervision.

Question 83

The continuing education requirements to renew a real estate license are a. 15 hours every two years. b. 15 hours every three years. c. 30 hours every two years. d. 30 hours every three years with a managing broker.

Answer 83

(a) 15 hours every two years. Licenses expire but can be renewed every two years. 15 hours of continuing education is required for renewal.

Question 84

A real estate firm may be paid by more than one party if a. all parties agree, in writing, before an offer is signed. b. all parties agree, in writing, before the transaction closes. c. the arrangement is kept confidential. d. the designated broker agrees.

Answer 84

(a) all parties agree, in writing, before an offer is signed. More than one party can pay a real estate firm if those parties agree, in writing, before an offer has been signed. The arrangement cannot be kept confidential.

Question 85

If a real estate licensee exercises control over any transaction funds, those funds a. belong to the seller. b. are considered trust funds. c. belong to the buyer. d. belong jointly to the seller and buyer.

Answer 85

(b) are considered trust funds. Transaction funds do not belong to a broker but instead are considered trust funds and must be handled in compliance with laws and regulations.

Question 86

A real estate salesperson is typically hired as a(n) a. employee. b. management trainee. c. independent contractor. d. apprentice for 6 months.

Answer 86

(c) independent contractor. A real estate salesperson can be retained by a broker as either an employee or independent contractor. Retaining a salesperson as an independent contractor provides the broker with significant tax advantages. Most real estate salespeople are retained as independent contractors.

Question 87

When a salesperson receives trust money the salesperson must promptly a. deposit it in the firm’s trust account. b. give it to the party entitled to receive it. c. deposit it with the Real Estate Commission. d. deliver it to the broker.

Answer 87

(d) deliver it to the broker. When a real estate salesperson receives trust money, the salesperson's only choice is to promptly deliver it to the broker.

Question 88

The record retention requirement for real estate licensees is a. 1 year. b. 3 years. c. 4 years. d. 5 years.

Answer 88

(d) 5 years. All Maryland real estate licensees must maintain transaction records and other required documents for five years.

Question 89

Which of the following is a duty of a licensee? a. A duty to verify the accuracy of a statement made by an expert b. A duty to conduct an independent investigation and the other party's financial condition c. A duty to conduct an independent investigation of the property d. A duty to present all written offers and counteroffers

Answer 89

(d) A duty to present all written offers and counteroffers The duties mentioned in the first three choices are not owed by a real estate licensee by statute.

Question 90

When a brokerage firm engages in a dual agency transaction, who is/are the dual agent(s)? a. The brokerage firm b. The broker c. The brokerage firm and the broker d. The intracompany agents

Answer 90

(b) The broker When a brokerage firm exercises dual agency, the broker or branch office manager is a dual agent. The dual agent must appoint one intra-company agent to represent the interests of the seller/landlord and a separate licensee to represent the interests of the buyer/tenant.

Question 91

Which of the following is NOT confidential information? a. Information that the buyer will accept terms other than what is set forth in a written offer b. Information related to a client’s negotiating strategy c. Known material facts related to the property d. The motivations of the parties

Answer 91

(c) Known material facts related to the property Known material facts related to the property are not confidential and must be disclosed by all real estate licensees in the transaction.

Question 92

Which of the following is NOT a material fact? a. Information that substantially adversely affects the value of the property b. Information that substantially adversely affects a party's ability to perform its obligations c. That a homicide occurred on the property d. Information that operates to materially impair or defeat the purpose of the transaction

Answer 92

(c) That a homicide occurred on the property. The law specifically states that the following is not a material fact: that the property, or any neighboring property, was the site of a murder, suicide or other death, rape or other sex crime, assault or other violent crime, robbery or burglary, illegal drug activity, gang-related activity, political or religious activity, or other act, occurrence, or use not adversely affecting the physical condition of or title to the property.

Question 93

A brokerage relationship begins when a. a client enters a real estate brokerage agreement. b. an offer has been made or received. c. the broker and client first meet. d. the broker completes all affiliation work for the licensee.

Answer 93

(a) a client enters a real estate brokerage agreement. Brokerage relationships are created through the use of written broker services agreements.

Question 94

Unless otherwise agreed, a broker does NOT owe a duty to a. exercise reasonable skill and care. b. conduct an independent inspection of the property. c. act honestly and in good faith. d. present all offers.

Answer 94

(b) conduct an independent inspection of the property. Unless otherwise agreed, a broker does not owe a duty to conduct an independent inspection of the property, conduct an independent investigation of either party's financial condition or independently verify the accuracy or completeness of any statement made by either party.

Question 95

The primary obligation of a Maryland real estate licensee is to a. protect and promote the interests of the client. b. be fair and honest with all parties. c. give the client excellent service and sound advice. d. sell as much property as possible.

Answer 95

(a) protect and promote the interests of the client. Maryland law and the NAR Code of Ethics both cite protecting promoting the interest of the client as the primary obligation.

Question 96

"Brokerage agreement" means a written agreement a. between any licensee and a client. b. before the party enters a purchase contract. c. between a broker and a salesperson. d. between a broker and a client.

Answer 96

(d) a broker and a client. A brokerage agreement is created by written contract between a broker and a client. It is useful to remember that a salesperson will sometimes sign a brokerage agreement, but that does not make the salesperson a party to the agreement. The salesperson is acting on behalf of the broker.

Question 97

Which of the following duties of a broker survive the termination of the agency relationship? a. The duty exercise reasonable skill and care b. The duty to account for money and property received c. The duty to deal honestly and in good faith d. The duty to disclose all existing material facts known by the broker

Answer 97

(b) The duty to account for money and property received A broker has limited duties after the termination of a brokerage agreement.There are two duties owed by a broker that survive termination of the agency relationship, the duty to account for money and property received, and the duty of confidentiality.

Question 98

The “Agency Disclosure” that must be given to all parties in a residential transaction a. explains who represents whom. b. provides a summary of real estate law. c. explains the responsibilities of personal assistants. d. explains the authority of the Real Estate Commission.

Answer 98

(a) explains who represents whom. The Agency Disclosure explains who represents whom and the title of the form is “Understanding Whom Real Estate Agents Represent”.

Question 99

A residential landlord must provide a prospective tenant with information regarding a. the hazards of formaldehyde. b. security deposits. c. local weather conditions. d. noxious weeds.

Answer 99

(b) security deposits. A landlord must give a prospective tenant information regarding details about security deposits, identification of any nonrefundable fees (e.g. cleaning fees) and existing damages to the unit (property condition inspections).

Question 100

Real estate appraisers are regulated by the a. Secretary of State. b. State Commission of Real Appraisers and Home Inspectors. c. Real Estate Commission. d. Attorney General.

Answer 100

(b) State Commission of Real Appraisers and Home Inspectors. Real estate appraisers are regulated by the state Commission of Real Estate Appraisers and Home Inspectors.