Chapter 1

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PROPERTY OWNERSHIP
Property is Anything Capable of Ownership

I. ORIGIN OF CALIFORNIA REAL PROPERTY LAWS

English Common Laws: The original source of the majority of California laws.
Community Property Laws: Are of Mexican and/or Spanish Origin, and were
retained through the Treaty of Guadalupe Hidalgo.

II. TWO CLASSIFICATIONS OF PROPERTY

Personal - Anything Movable. Any property not considered real.
Real - Anything Immovable or Immovable by Law. Any property not considered
personal.

III. PERSONAL PROPERTY (Chattels)

A. Classifications Of Personal Property
1. Choses in Action- Intangible Items. Documents giving holder a right to an
action. Examples: Trust Deeds, Mortgages, Leases, Security Agreements, etc.
CHATTEL REAL: Any document relating to a right or interest held in real
property. Examples: Leases or rentals on real property.
2. Choses in Possession - Tangible Items.
Examples: Automobiles, Money, Furniture, Jewelry, Stock in Trade of a Business or TRADE
FIXTURES (Fixtures used to operate a trade or business even if firmly attached to the

real property may be legally removed and taken).

B. Personal Property May Be Sold and/or Conveyed (Alienated)

1. Bill of Sale - The document that evidences transfer of personal property.
a. Required to be valid
1) Dated. 2) In Writing. 3) Identify Subject Matter. 4) Signed by the Vendor.

b. Not required to be valid

1) Vendor's signature acknowledged (required only if wanting to record).
2) Recording the bill of sale.

C. Used As Security
1. Hypothecated - Given as security while retaining ownership and the legal
possession of the
property. (e.g. - House, apartment building, etc.)
2. Pledged - Given as security while retaining ownership, but transferring legal
possession to the lender. (e.g. - Pawn Shop, where items pledged as security).
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D. Subject To Property Taxation

Tangible personal property can be assessed for the purpose of taxation.

IV. REAL PROPERTY

A. Land (Boundaries)
1. Surface: The area on the surface of the Earth.
2. Material beneath the surface: Extends to the center of the Earth.
Reasonable rights to surface entry implied unless entry is expressly limited to a
footage below the surface.
3. Airspace: Infinite height. Due to modern changes it is subject to air travel and
may be used only to a "Reasonable And Enjoyable Height"

B. Appurtenances
Benefits or rights legally attached to become part of the land, which the owner of
the land receives as part of their ownership rights.
Examples: Easements or Water Rights

C. Affixed
1. Considered real property
a. Buildings, fences, certain types vegetation, etc.
b. Trees and Shrubs attached by roots.
1) Natural growth.
2) Trees or Vines (used for Commercial growth).
3) Commercial growth not previously sold by contract.
2. Not considered real property
a. Seasonally planted crops, known as Emblements. Emblements are personal
possessions that may be harvested even if the rental or lease agreement has
expired. - Reasonable right of entry and exit is granted by law.

b. Commercial growth which has been previously sold by contract.

Note: Deciduous - A term quite often used on the exam. Describes: "Any type of a
plant or tree that sheds its leaves on an annual basis". Not a type of soil, but a
type of plant.

3. Fixtures
Personal property attached to real property in such a way as to become a part
of the real property.
Note: Fixtures - Cannot be legally removed without prior agreement.
Trade Fixtures - May be removed without the necessity of an agreement.

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The 5 Tests (Used to determine whether or not an item is a fixture)

_________________________________________________________________________________________________________________________________________________________________

(M) Method of attachment

(A) Adaptability
(R) Relationship between the Disputants
( I ) Intention of the Parties
(A) Agreement or Basic Rule
Note: Not one of the tests: The cost of the item nor date of purchase.

RIGHTS IN REAL PROPERTY

(Also described as "Title or Ownership")

Bundle of Rights - The basic rights to Use, Possess, Will, Convey, Encumber,
Exclude, etc.

I. OWNER'S RIGHTS
A. Reservation - Withholding a right or rights when conveying title.
Examples...Minerals, Oil, Natural Gas, etc.

B. Exception - Withholding part of the described property when conveying title.

Example..."I hereby convey all of Parcel 7, except the West half"

C. Lateral (side) or Subjacent (lower) Support

D. Water Rights
California State Water Resources Board: Controls water; Arbitrates disputes.
1. Riparian Rights
Rights of adjacent owners to the use of water on navigable and non-navigable
waterways or watercourses (rivers and streams).
a. Boundary Lines - If navigable, to edge of river/stream (medium high tide
mark). If non-navigable each owns to the mean center of river/stream.
b. Use of Water - Reasonable use.
2. Littoral Rights
Rights of adjacent owners to the beneficial use of (quiet) waters in a lake, sea
or underground. (Very Seldom asked about on exam)
3. Mutual Water Company
Privately owned water company. Incorporated, with each property receiving a
"Share of Stock" which evidences their ownership rights to receive water.
a. Stock Certificate - Evidence of ownership rights (PERSONAL)
b. Stock in the Mutual Water Company - The right(s) that are conferred (REAL)

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4. Percolating Water
Water having no defined channel. Law allows for the "Beneficial use of such
water" (e.g. - water table).
5. Flood or Surface Waters
Not to be diverted onto the land of another, however an owner has the right to
protect their property from flood.
6. Appropriation
A right given a non-riparian owner to acquire water if need is proven. Granted
by the California State Water Resources Board.
7. Loss of Land
a. SLOW Natural Process
1) Erosion - Natural wearing away of land. Title to a part or all could be
lost.
2) Accretion - Addition to, or build-up of land by natural causes.
3) Alluvium - Name of the soil that is deposited through accretion.
b. QUICK Disastrous Process
1) Avulsion - The sudden ripping or tearing away of the land (e.g. -A flood).

II. RIGHTS OF ENTITIES OTHER THAN THE OWNER

The State maintains certain rights in privately owned property. These rights may be
extended to the political subdivisions of the State (the city and county governments)
and others, such as hospitals, utility companies, etc.

A. DOCTRINE OF EMINENT DOMAIN

Private property taken for beneficial public use.
Examples: Freeways, highways, dams, power stations, hospital sites, parks, etc.

1. Process:
a. A negotiation is made to purchase the land.
1) Owner may sell. Owner is compensated.
2) Owner may refuse to sell.
If owner refuses to sell, power of
condemnation is invoked. Owner still receives "just" compensation.
Note: Under 1) or 2), owner generally paid for real property but not personal property.

B. POLICE POWER
Regulating the use of land
The right of the state to enact laws; of cities or counties to enact ordinances for
protection and the "Health, Welfare, Safety, Morals and General Well-Being" of the
public.
Examples: Zoning Ordinances or Condemnation of property for health or safety reasons.

Note: Compensation is not required for actions instituted under Police Power.

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C. ESCHEAT
Reversion of unclaimed property to the State
a. Action takes place when death occurs and the deceased party leaves NO
WILL, and NO HEIRS to claim the estate.
b. Not automatic - requires a 5 YEAR WAITING PERIOD.

ESTATES IN PROPERTY
Two Types of Estates - Freehold and Less-than-Freehold

I. FREEHOLD - Ownership evidenced by deed. Conveys existing "Bundle of Rights".

A. Three Essential Characteristics
1. Freely Transferable (can be deeded)
2 Freely Inheritable (can be left by will)
3. Of an Indefinite Duration (No definite ending time)

B. Two types of Freehold Estates - Fee and/or Life

1. Fee Estates
Also known as a Fee, Estate In Fee or Fee Simple. The term fee refers to an
"Inheritable Estate". There are two Categories of Fee Estates;
a. Absolute - Maximum interest attainable in real property. Contains no
conditions or qualifications.
b. Defeasible (defeatable) - Contains conditions or qualifications that may cause
the possible forfeiture of the title if violated.
e.g. - "This property is conveyed with the condition that it shall be used for religious
meetings only. If condition is violated the property is to revert to me or my heirs"

2. Life Estate
An estate measured by the life of the grantee of the estate or a third
designated party. Upon designated party's death, Life Estate rights will pass to
the party holding the;
a. Estate in Reversion - Reversion of rights to grantor, or grantor's estate.
b. Estate in Remainder - Remainder of rights to someone other than grantor or
their estate.
Characteristics of a Life Estate
The grantee of the Life Estate is:
a. Required to pay the property taxes and insurance;
b. Cannot commit waste (allow the property to run-down), and may be required to
pay the interest, but not the principal on any outstanding loans against the
property.
Upon the death of the designated party, the Life Estate with any existing
interests (rentals, leases or owners) will terminate. The property will then vest in
the pre-designated Reversion or Remainder Estate Holder.

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Two Examples of Life Estates

Able grants to Baker for the Life of Baker. Upon Baker's death, property
Reverts to Able.
Grantor - Able
Grantee - Baker
Life term - Based on life of Baker
Upon termination - Estate reverts to Able
Able grants to Baker for the Life of Cady. Upon Cady's death, property
Reverts to Able.
Grantor - Able
Grantee - Baker
Life Term - Based on life of Cady
Upon termination - Estate reverts to Able
Note: In examples above, the estate was set up as a reversion. If instead, it were to go to
someone other than Able, an Estate in Remainder would have been created and upon
termination, the estate would vest in the third designated party (Remainderperson).

II. Less-Than-Freehold Estates

Also known as Leasehold Interests

A. Types of Leaseholds
1. Estate for Years - Any specified period of time. Definite termination date.
2. Estate at Sufferance - Tenant holds over after Estate for Years has terminated.
3. Periodic Tenancy - Day to Day, Week to Week, Month to Month.
4. Estate at Will - An agreement to allow a tenant use of a premises at the will of either
or both parties - Generally verbal. California Law requires prior notice to terminate.

B. Owners Rights (Lessor/Landlord)

The owner has the right to be paid the rent (compensation for the use of the
property) unpaid, Remedies are:
1. Default in the Estate for Years
Abandonment of lease by lessee; recourses either a., b. or c. below. Violation of lease terms
or non-payment of rent; recourse d. below.

a. Sue as installment/installments become due;

b. Re-let on behalf of the tenant and sue for any difference between amount
due and amount collected;
c. Consider abandoned, draw new lease directly with new party (novation);
d. Evict.
1) 3-Day Notice to Pay or Quit served on tenant (1st Step);
2) Unlawful Detainer Action filed (Starts legal action);
3) Court Order for possession obtained from the court (Needed to evict);
4) Sheriff evicts tenant (Final Step).
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2. Default in the Periodic Tenancy

Eviction Step d. on previous page.
3. Owner has right to sell the property
Property is sold subject to the existing lease (Lessee's rights remain valid).
4. Owner has right to assign ownership of lease
Another party would pay to purchase the landlord's rights; primarily, the right to
collect the money due from the tenant.

C. Lessee/Tenant's Rights
1. Two implied rights - Legally considered part of the contract though possibly
not expressly mentioned in agreement;
a. Right to "Quiet Enjoyment and Possession" of the premises;
b. Right to have "Property fit for Human Habitation" relating to health and safety.
2. To Assign or Sublet the premises (On Estate for Years only).
May be done by lessee if not expressly prohibited in lease agreement
a. Subletting - A "re-letting" of the property by the lessee to another. Where
anything less than a full transfer of all lessee's lease rights, obligations, and
duties have been made. Leasee may sublease in the absence of a written
prohibition.
e.g. - Lessor lets to Lessee, then Lessee re-lets to another (Sublessee).
1) Lessee is responsible under terms to Lessor (Lessee is tenant of Lessor).
2) Sublessee's obligations are to Lessee only, not Lessor (Sublessee is
tenant of Lessee, not Lessor).
b. Assignment - A "transfer" of the entire terms of the lease to another party,
known as the assignee. New party becomes primarily liable for lease
terms, but original lessee retains a secondary liability in the event of nonperformance.
e.g. - Lessor lets to Lessee, then Lessee (Assignor) transfers lease to Assignee.

1) Lessee (Assignor) transfers all their lease rights to another (Assignee).

2) Assignee now has taken the Lessee's place in the rights and obligations
of the lease. However, the Lessee has transferred only the primary
obligation, and still retains a secondary obligation.

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D. Types of Leases
1. Straight Lease (Fixed, Flat or Gross) - Tenant pays a fixed sum as rent, landlord
pays expenses.
2. Net Lease - Landlord receives a net sum from tenant. Tenant pays some/all
expenses.
3. Graduated Lease - Contains an Escalator Clause. Rent payments can be
changed based on the escalator, which usually is tied to an increase in
expenses or a cost of living index.
4. Percentage Lease - Tenant usually pays a minimum rent and/or a percentage
of their
gross income. Greatest percentage usually paid by low overhead
businesses (parking lots, garages, storage companies, etc.). Smallest percentages by
businesses with high overhead costs (supermarkets, etc.).
5. Sandwich Lease - Any party in a lease who maintains a dual position of
landlord and tenant [Any interest(s) that lie between the original lessor and the
current occupying lessee];
Example: Smith
LESSOR
[original]

leases to Jones,
then Jones
to LESSEE,
then LESSEE
[SANDWICH LEASE]

subleases to Baker
to SUBLESSEE
[Occupying]

E. Requirements to Create A Valid Lease

1. Naming the parties to the agreement (lessor and lessee)
2. Term of the lease
a. If agricultural property - maximum term 51 years
b. Any other privately owned property - maximum term 99 years
3. Amount of rent (How much? Not necessary to indicate when to be paid)
4. Description of premises
5. Signed by the Lessor
Does not have to be signed by the lessee.
accepted if:

Lease terms are presumed

a. Lessee pays amount of rent indicated to landlord and landlord accepts.

b. Lessee takes possession of the described premises.

F. Not Required To Create A Valid Lease

1. Not required to be "In Writing"
Must be in writing if over one year term to be enforceable.
2. Need not be "Acknowledged or Recorded"
If to be recorded, Lessor's signature must be acknowledged.

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G. Termination Of The Lease (other than normal expiration)

1. Illegal use by the tenant/lessee.
2. Lessor's responsibilities not kept (health and/or safety).
3. Premises destroyed as to become unusable.
4. Condemnation of the premises.
5. Surrender - Occurs as a result of the landlord/lessor and tenant/lessee
mutually agreeing to release each other from their lease obligations.
6. Novation - An entirely new lease drawn with the same party or a new party
with the intention of replacing an existing agreement.

METHODS OF
A C Q U I R I N G, D I S P O S I N G OF, AND C O N V E Y I N G
REAL PROPERTY
I. PATENT
An original conveyance of land from the state or federal government.
Identified on the state exam as a "Sovereign," "Original," "Government," or "Land Patent."

II. DEED
An instrument used to evidence transfer of title of real property.
.

Title conveyed from Grantor (owner/seller) to the Grantee (buyer/one receiving the title).
A new deed is drawn for each transfer of title. Title cannot be conveyed by assignment
of previous deed.

A. Requirements To Create A Valid Deed

1. Must be in writing.
2. Must describe the parties to the conveyance.
3. Description of the property (does not have to be a legal description, but must
adequately describe the property).

4. Grantee must be capable (not competent) of receiving title.

5. Grantor must have capacity (must be competent) to convey title.
6. Grantor must sign the deed by signature or mark.
a. Use of a mark requires there be witnesses to the mark.
b. If the grantor does not have capacity, it would require the signature of a
court approved guardian or trustee.
7. Must contain "Action" or "Granting Clause".

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B. Not Required For A Deed To Be Valid

1. A consideration need not be shown.
2. It is not necessary to show a date of conveyance on the deed.
"First to Record is the First in Right". However this is subject to:
a. A party in possession holding an unrecorded deed which imparts
"Constructive Notice", or:
b. The conveyance to a buyer having "Actual Notice." Property had been
previously sold, but buyer bought property in spite of this fact.
3. A deed need not be recorded. Although this would give "Constructive Notice"
and establish priority in a disputed claim to ownership at a future date.
To Record a Deed:
1) Requires address to whom the property tax statement is to be mailed;
2) The deed must be acknowledged by the Grantor;
3) The "Documentary Transfer Tax" (if any) must be paid.

4. Legal description (not necessary) .

C. To Execute a Deed - Grantor Signs Deed

D. To Convey Title - A "Valid Deed" must be Delivered
1. With intent to deliver;
2. During grantor's lifetime.
3. Deed is "presumed" delivered if;
a. grantee in possession of deed, or if,
b. deed has been recorded.
4. Deed must be accepted by grantee (presumed accepted if not rejected).

E. Reasons That Would Cause A Deed To Be "Void"

1. If it is:
a. Altered,
b. Forged, or
c. Executed in blank (signed but not filled out).
2. If grantor had no legal competency.

F. Reasons That Would Cause A Deed To Be "Voidable"

1. The grantor is questionable as to legal competency.
2. The deed was obtained under duress, menace or through a fraudulent act.

G. The Different Types Of Deeds

1. Warranty Deed - Contains written warranties.
a. Legal but seldom used in California due to the use of Title Insurance.
b. Conveys "After Acquired Title".

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2. Grant Deed-Most commonly used in California to convey title. Conveys all title
grantor is passing including "After Acquired Title."
Contains two implied warranties:
1) Title was not previously conveyed to another; and
2) There are no encumbrances other than those known and revealed.
3. Quit Claim Deed-Contains "No Warranties". Conveys only that interest held
by the grantor at the time of conveyance. Does not convey "After Acquired
Title".
4. Gift Deed-Used to convey title for "Love and Affection (a gift)." If intended to
defraud creditors, transfer may be set aside within one year.
5. Tax Deed-Given to highest bidder after property tax sale.
6. Trust Deed-Used as a security instrument for a real property loan.
See Trust Deeds in Chapter 2.

7. Deed of Reconveyance-Used to release a lien created by a recorded trust

deed. See Trust Deeds in Chapter 2.
8. Sheriff's Deed-Issued to the successful bidder after a judicial foreclosure sale
after the statutory redemption period has passed.
See Mortgages in Chapter 2.

C. ADVERSE POSSESSION (Obtaining Title)

Requirements
Note: Adverse Possession cannot be claimed against a government entity.

1. Continued and uninterrupted actual occupancy for 5 years,

(Tack-on - Successive adverse holders may combine their possessory periods)

2. Open and notorious use,

3. Hostile to true owner's title,
4. Have paid the property taxes for the 5 year period and achieve title under;
a. Claim of Right (met above requirements) or;
b. Color of Title (met above requirements and in possession under a defective instrument).
NOTE: Purpose of subsequent court action to "Perfect the Title" (make good on public records).
D. WILL
A declaration by a person expressing their desire how they wish to dispose of their
property after their death.
1. THE DIFFERENT TYPES OF WILLS
a. Holographic - Entirely in maker's handwriting. Signed and dated by maker.
b. Witnessed - Written, maker's signature is witnessed by two witnesses.
c. Statutory - A will drawn using a legal form that may be completed without
legal assistance. Limits what may be disposed.

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2. WORD MEANINGS RELATING TO WILLS

a. Administrator - Male person appointed by court to handle the estate of
another.
b. Administratrix - Female person appointed by court to handle the estate of
another.
c. Ambulatory - Capability of a will to be changed (Only during maker's lifetime).
d. Bequest/Legacy - Personal property left by will.
e. Codicil - The instrument which makes an addition or deletion to a will.
f. Devise - Real property left by will.
g. Devisee - Name of party receiving real property by will.
h. Devisor - Name of party leaving real property by will.
i. Executor - Male person named in a will to handle an estate.
j. Executrix - Female person named in a will to handle estate.
k. Intestate - One who has died leaving no will.
l. Legatee - One receiving personal property by will.
m. Testate - One who died leaving a will.
n. Testator - Male person who has made a will.
o. Testatrix - Female person who has made a will.
Note: DEMISE means to give up or pass on. This term is predominantly found printed
in lease agreements, not wills. e.g. - "I hereby let and demise the following described property
to....."

3. THE PROBATE
The claims period for creditors, and time period the Court is given, to determine
the disposition of an estate.
a. Probate hearings are held in Superior Court (No Probate Court exists in
California).
b. Real property is probated in the state in which located.
c. Minimum probate period - Four (4) months.
Probate Sale
a) Bidding:
(1) Offer must be at least 90% of court Appraisal.
(2) If offer presented through real estate broker, court sets broker's
commission.
(3) Court must confirm all offers. A Second Bid is acceptable, but must meet a
minimum opening bid based on the following formula; It must be:

10% Higher on the first $10,000 of the original bid;

5% Higher on amount over $10,000.
Example - First bid $12,000
$12,000 is broken into first $10,000 and the balance
$10,000 x 10% = $ 1,000 overbid required on this portion
$ 2,000 x 5% = $ 100 overbid required on this portion
$ 1,100 Total overbid required, plus
+ $12,000 First accepted bid
$13,100 MINIMUM ACCEPTABLE SECOND BID

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(4) If a second bid is accepted by the court, the sale of the property may
go to open auction. At this time minimum bids may be set at court's
discretion, but only for the purpose of speeding up bidding process.
E. SUCCESSION
A series of heirs or rightful successors.
1. COMMUNITY PROPERTY (Held by married persons only)
a. Testate - Deceased's half may be passed by will.
b. Intestate - Deceased's half passes to the surviving spouse.
2. SEPARATE PROPERTY (If held by married persons)
Property acquired and owned prior to marriage, or received during marriage
through gift or inheritance. Must be maintained separately.
a. Testate - All may be left to anyone chosen by will.
b. Intestate
1) Spouse and no children....1/2 to the spouse and 1/2 to the heirs.
2) Spouse and one child........1/2 to the spouse and 1/2 to the child.
3) Spouse and two or more children...1/3 to the spouse and 2/3 to the
children.
F. ACCESSION
An increase to real property by addition
A permanent addition to another's real property becomes a part of that property,
and will now belong to that property's owner.
e.g. - One builds an improvement on a neighbor's land in error. The neighbor may become the
owner of this misplaced improvement through accession.

METHODS OF
PROTECTING OWNERSHIP RIGHTS OBTAINED IN REAL PROPERTY
A. CONSTRUCTIVE NOTICE
This notice is given in one of two ways:
1. By taking possession of the property, or
2. By recording the deed to the property.
B. ACTUAL NOTICE
Given as a result of anyone having knowledge that another already owns the
property (not recorded or through possession). e.g. - John told Sam he sold his property
to Pete. Pete hasn't recorded the deed or taken possession. Sam has Actual Notice of Pete's
ownership.

C. ABSTRACT OF TITLE
A record of the history of title to real property. Companies known as Abstract
Companies collect documents and records relating to specific properties then sell
them to interested parties. No Guarantee is made as to the condition of title.

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D. CERTIFICATE OF TITLE
An opinion as to the condition of the title. Usually issued in writing by an attorney
viewing the Abstract. No Guarantee is made or insurance provided to protect the
title.
E. GUARANTEE OF TITLE
A guarantee against losses resulting from matters of public record only. Does not
protect against off-record risks nor provide any protection for any claims where the
record is not correct as appears.
F. TITLE INSURANCE
Insures property owners against losses due to specific happenings or conditions
that were spelled-out in the issued policies. This form of protection has been
considered the ultimate in the quest for a marketable title to real property.
Protects whom: Initial insured party's interest, their executors, administrators and heirs.
Protects against: Title defects, liens or encumbrances affecting title at time policy issued.
1. TYPES OF COVERAGE
a. California Land Title Association (CLTA)
1) Standard Policy of Title Insurance
Provides the following coverage (expressly excludes all other coverage's)
a) Matters of public record
b) Forgery in the chain of title
c) Lack of capacity of anyone in chain of title
d) Defense costs (attorney/court)
2) Extend Coverage by eliminating exclusions from Standard coverage
By adding back makes available any or all of the following;
a) Matters not of public record
b) Water rights
c) Rights of parties in possession
d) Physical aspects
b. American Land Title Association (ALTA)
A policy created by the American Land Title Association providing a more
complete coverage for lenders.
c. Joint Coverage Policies
Normally borrowers provide themselves with a CLTA Standard Coverage
and by request provide the lender with an ALTA Policy.
d. Government Regulations
No title insurance policy provides protection against losses resulting from
governmental regulations. e.g. - Zoning Changes.

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METHODS OF TAKING/HOLDING TITLE TO REAL PROPERTY

A. WHO CAN OWN PROPERTY?
1. Natural persons
2. Legal persons (corporations)
B. HOW TITLE MAY BE TAKEN

1. Severalty/Sole Ownership
a. By individuals
b. By legal persons (*corporations)

2. Tenants in Common (two or more separate parties)

a. By individuals
b. By legal persons (*corporations)
c. By husband and wife

3. Joint Tenants (two or more separate parties)

a. By individuals
b. By husband and wife

4. Community Property
1

a. By husband and wife only

*NOTE: Corporations may not hold title as "Joint Tenants" nor as "Community Property".

C. CHARACTERISTICS OF METHODS OF HOLDING TITLE

1. Severalty/Sole Ownership
a. Owned by one natural or legal person (corporation)

2. Concurrent/Co-tenancy Ownership's
a. Tenancy in Common (Tenants in Common)
One unity required, Equal rights of possession.
1) Interests may be equal or unequal.
2) Interests held are undivided (no specific divided portion of the property is
owned).
3) Possession rights are equal no matter what percent of interest owned.
4) Part or all of interest owned may be sold.
5) May be passed by use of a will.

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b. Joint Tenancy (Joint Tenants)

Creating a valid joint tenancy requires "Four Unities":

(P) - Possession (All parties have equal rights of possession)

(I) - Interest (Equal only)
(T) - Title (All parties named on the same document)
(T) - Time (All parties took ownership on the same date)
1) Interests must be equal.
2) Interests are undivided (no specific divided portion of property is owned).
3) Possession rights are equal and undivided.
4) Part or all of interest owned may be sold.
5) Interest cannot be passed by will (Rights of Survivorship). Upon death of a
joint tenant, their interest would vest in the surviving joint tenant or
tenants.
c. Community Property
1) Interests must be equal.
2) Interests are undivided (no specific divided portion of the property is owned).
3) Possession rights are equal.
4) May sell part or all of their interest.
5) Either may leave their interest by will, if not, then by the process of
intestate succession it would pass to the surviving spouse.

D. Presumption of Title - When the method of title is not indicated on the Deed
A presumption is something that is presumed to be true unless proven differently.
1. If deed does not indicate parties as "Husband and Wife", even if last names are
the same, presumption is, title has been taken as "Tenants in Common", never
a presumption of Joint Tenancy.
2. If deed indicates parties as "Husband and Wife", presumption is Community
Property.

E. Partition Action -Terminating a tenancy by legal action

A court action used to separate the interests of the co-tenants by dissolving the
tenancy due to an unresolved dispute between the parties.

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Chapter 2
______________

ENCUMBRANCES
An encumbrance is anything that creates a burden on the title of real property

I. TWO TYPES OF ENCUMBRANCES

Non-Money Encumbrances - Burdens title, not due to owing money.
Money Encumbrances - Also known as "liens," the result of owing money.
A. Non-Money Encumbrances
Restrictions (Covenants & Conditions) and Easements

1. Restrictions (Public and Private)

Created against property. While in force they transfer by deed to any new owners.
a. Private Restrictions

1) Creation
a) Generally created by the developer, or by an owner transferring title.
b) Restrictions are usually for a designated time period (e.g. - 50 years).
c) Usually allow for changes by vote of a certain percentage of property
owners; e. g. - Majority vote. May take place anytime, at renewal periods, or predesignated dates .

2) Conveying knowledge of restrictions to buyer

a) Original Conveyance - Made a part of (incorporated into) the deed itself or
made mention of in the deed and recorded in public record.
b) After Original Conveyance - Usually recorded (Public Notice).

3) Methods of restricting use - Covenants and Conditions

Restrictions take the form of Covenants and/or Conditions commonly
referred to as CC&Rs (Covenants, Conditions and Restrictions). They
will transfer by deed even if not mentioned in the deed after original
conveyance.
4) Covenants
Defined as: "A promise to either do or not do a certain thing." Created
with the intent to protect and preserve the values of the properties.
a) Remedies for violation of Covenants:
(1) Suit for Money Damages through court action, or
(2) Filing Injunction to stop violation.

27

5) Conditions (can affect title)

Created by grantor (usually the developer), whereby the grantor or grantor's
heirs have the right to the return of title (ownership) of property if a proven
violation occurs. If estate is Fee Simple, condition would make it a "Fee
Simple Defeasible" Estate.
6) Additional Information
The penalty for violation of a "Condition" (possible loss of ownership) would
be more severe than violation of a "Covenant" (damages or an injunction).
a) "Conditions" remain with title indefinitely. "Covenants" usually end after a
definite period of time.
b) Covenants and Conditions do not hinder conveyance of title while in
existence, but pass to the new owner who must abide by them.
c) Race Restrictions in existing CC&Rs and deeds were ruled illegal therefore
unenforceable as a result of a 1943 court decision (Shelly vs. Kraemer).

b. Public Restrictions (Land Control and Fair Housing)

1) Land Control
a) Local Governments
Cities - Incorporated areas
City government: City Council (Elected)
Planning: Planning commission optional
Required: Master plan (Blueprint) of community
Enforcement: Through Police Power (e.g., Zoning Restrictions)
Counties - Unincorporated areas
County government: County Board of Supervisors (Elected)
Planning: Planning Commission required by State Law
Required: Master plan (Blueprint) of community
Enforcement: Through Police Power (e.g., Zoning Restrictions)
b) Basic Zoning Symbols (City and County)
R-1 - A Single-Family Residence Dwelling Unit
R-2 or higher - Multiple-Family Residential Dwelling Units
A - Agricultural Use
C - Commercial Use
M - Manufacturing or Industrial Use

28

c) Changing Established Zoning (City and County)

(1) Procedure:
Step 1 - File a petition (request) for Change of Zoning or Variance
to use with local Planning Commission;
Step 2 - Hearing date is set;
Step 3 - Public Notice of hearing is made;
Step 4 - Hearing held. If decision adverse, appeal can be made
to the next higher public body (City Council or County Board
of Supervisors).

d) Types Of Changes
(1) Variance - To vary the use or zoning requirement of a
property without changing the zoning (generally limited in time).
e.g. - Changing a setback requirement from 6 feet to 4 feet.

(2) Rezoning - A blanket zoning change for a large area or group of

properties for a different but compatible use.
(3) Spot Zoning - Changes zoning of one parcel or a small group of
parcels. e.g. - To change a single family dwelling to commercial.
(4) Downzoning - Local government makes zoning change from
higher to lower use e.g. - R-4 (multiple units) to R-1 (single family
residential use).

(5) Strip Zoning - Local government changes zoning of a strip of

lots within a residential zone to compatible commercial use.
(6) Grandfathering (Non-Conforming use) - When zoning changed,
but a property retains a non-conforming use (e.g. - commercial
building built in area, zoning in area changed to residential use) prior
continued to be allowed.

2) Fair Housing Laws

a) THE STATE LAWS
(1) The Unruh Civil Rights Act
"All persons within the jurisdiction of this State (California) are free
and equal, and no matter what their Sex, Race, Color, Religion,
Ancestry, National Origin or Disability are entitled to the full and
equal accommodations, advantages, facilities, privileges, or services
in all business establishments of every kind whatsoever...."
Complaints filed in a Civil Court. Violators may be subject to:
(a) Paying Actual Damages (proven);
(b) Punitive Damages of up to 3 times the amount of actual damages,
but no less than $1,000; and
(c) Paying the offended persons attorney fees
29

(2)

The Fair Employment and Housing Act (Rumford Act)

(a) Purpose of the law: Prohibits discrimination in the sale,
rental, lease or financing of practically all types of housing due
to Age, Race, Color, Religion, Sex, Marital Status, National Origin,
or Ancestry.
(b) Applies to: All housing accommodations including singlefamily dwellings.
(c) Exceptions
i. Renting or leasing to one roomer or boarder to live within the
household.
ii. Provides an exception to arbitrary age discrimination by allowing
for an age criteria for Senior Citizen Retirement Communities.

(d) Advertisements: Prohibits sale or rental advertisements from

containing Discriminatory Information.
(e) Complaints: Submitted within 60 days to "Fair Employment
and Housing Commission". In the event of a violation;
i.

Sale of Real Property - The owner must go through with the

sale if still available. If not, a like property if one is available.
ii. Rental of Real Property - Owner must go through with rental.
If rented, offer a like unit. If no like unit, next available unit.
iii. Punitive Damages - Payment of up to $1,000 in damages in
addition to the above remedies.

(3) The Housing Financial Discrimination Act (Holden Act)

(a) Purpose of the law: To eliminate discriminatory practices by
lenders who avoided making loans in certain high-risk areas. This
practice is commonly referred to as Redlining.
In the event of a violation: Violator ordered to make the loan and
pay a fine of up to $1,000.

b) THE FEDERAL LAWS

(1) Title VIII of the Civil Rights Act of 1968

A federal law that prohibits discrimination in the sale of dwellings
or land to be used for dwellings by owners or their agents.
(a) Purpose of the law: To provide within constitutional limitations for
fair housing throughout the United States.
(b) Complaints: Submitted to Secretary of Housing and Urban
Development (HUD) within 180 days of the violation.
(c) Enforcement
i. By the United States Attorney General's Office.
ii. Cases handled in the Federal Courts.

30

(2) Jones Vs Mayer Decision (Ruling made in 1968)

One of the most recent Supreme Court decisions to set a
precedent regarding discrimination.
(a) The ruling: There will be no Discrimination against anyone in the
United States in the sale of real or personal property.
(b) Basis of decision - Civil Rights Act of 1866.
(c) Constitutionality of decision - The 13th Amendment.

c) The Laws as they Affect Licensees

(1) State
Prohibits sale or rental advertisements from containing any type
of discriminatory information.
(2) Federal
Regarding real estate licensees they:
(a) Must not accept class discrimination listings,
(b) Must not make, print or publish any notice, statement, or
advertisement with respect to a sale or rental of a dwelling
that suggests discrimination because of Race, Color, Religion
or National Origin.
d) Rights of Those Discriminated Against
A party may file a civil action in either State or Federal Court.

2. Easements
The right to use the land of another
Easements Are Classified As Real Property. They create a real property
interest/right but not an estate in real property.

a. Two Types of Easements

Easement Appurtenant
Easement in Gross
1) Easement Appurtenant (transfers with the land)
a) Requires "at least two parcels under separate ownership."
b) The parcels "do not have to be adjoining".
c) If easement "Benefits the land"...it is considered an "Appurtenance."
d) If easement "Burdens the land"...it is considered an "Encumbrance."

31

Dominant Tenement
Receives the right to use the land, and benefits from the easement that
is appurtenant to the land.
Servient Tenement
Is burdened by the easement and therefore the easement is an
encumbrance to the land.

2) Easement In Gross
The purpose is not to benefit a parcel of land, but to give a personal
right to someone (legal/natural) to use the land of another. Often
granted to Utility Companies to erect and maintain utility lines.
Dominant Tenement
"None"
Servient Tenement
Is burdened by the easement and therefore the easement is an
encumbrance to the land.

b) Creation of Easements
1) By Deed (Express or Implied)
a) By Reservation
Transferor deeds a portion of their property to another but retains an
easement in the transferred portion.

b) By Express Grant
Transferor deeds a portion of their property to another and grants an
easement along with it.

2) By Separate Contract
A written agreement granting an easement.
3) By Implication
The method of development of land or rights granted in the land would
imply that the right of use would exist. e.g. - Granting permanent timber
rights or a common driveway.
4)

By Necessity
Court Action - Rights of INGRESS (entry) and EGRESS (exit).
It is contrary to law to sell landlocked parcels of land in this State. The
owner of a landlocked parcel may file a court action to request that an
easement be created to provide their property access to a road, if
possible.

5) By Statutory Dedication
Relates to areas of land dedicated for public use in the creation of new
subdivisions. e. g. - Streets, park areas, etc.

32

6) By Prescription (Use of property)

There are specific requirements necessary in order to establish a
Prescriptive Easement:
Continuous and Uninterrupted Use for Five Years;
Hostile and Adverse to the True Owner (No Permission);
Open and Notorious Use (Not hidden from the owner);
Claim of Right (Claiming party meets requirements), or;
Color of Title (Claiming party had an easement, but the instrument
used was defective and not valid. Now claims under prescription to
perfect their right in the property.)

c) Termination of Easements
1) Express Release
Party who benefits releases their right by written agreement or by Quit
Claim Deed.

2) Non-Use
Prescriptive easements may be lost after 5 Years Non-Use.

3) Abandonment
The easement is not now being used for its original purpose.
e. g. - Forest ranger has an easement for a fire road through a property. At a
future date it was decided the road was no longer needed.

4) Merger
Dominant and servient tenements come under the same ownership.

5) Destruction of the Servient Tenement

The property burdened by the easement no longer exists.
e. g. - Servient property taken by condemnation as a result of a county road
being widened.

d. Additional Information Regarding Easements

1) Recording: Not necessary to be valid or effective.
2) In Writing:
3) Location:
4) Transfer:

Required, unless created by implication.

Specific location not required. May be "Unlocated or
Floating" (no specific location of use).
Automatic, even if not expressly included in the deed.

5) Duration:
Indefinite, unless created by prescription.
6) Termination: By Dominant Tenement. If acquired by prescription as
a result of 5 years continuous non-use.

33

LICENSE Vs EASEMENT
A license is a personal right that grants permission to do a certain thing. It is
unassignable and revocable; whereas an easement creates a real property right, and is
permanent and irrevocable.
LICENSE
EASEMENT
Right
Granted to a person
Granted to a property
Use
Permissive
Permanent
Termination Rights
Revocable
Irrevocable
Assignability
Unassignable
Passes with the land

ENCROACHMENT
An intrusion onto the property of another by improvements or growth.
Example - Balcony built over the property of another or overhanging tree limbs.

Remedy: Legal action must be brought within 3 Years after date of discovery. If not,
right to remedy will be lost (Statute of Limitations).

B. MONEY ENCUMBRANCES
1. Types of Liens
a. General Liens (Involuntary Only)
Claims are for dollar damages and may be collected against any property of
the debtor, real or personal, which is not legally protected from an execution
sale.
1) Judgments (e.g. - Injuries, property damage, personal or business debts)
2) Income Tax Liens (State or Federal)
3) Attachment Liens
b. Specific Liens (Voluntary or Involuntary)
1) Voluntary
Liens voluntarily placed on a property by its owner. Normally given for
the purpose of borrowing money. If the collateral fails to satisfy the
debt, other assets may be looked to for satisfaction.
a) Trust Deeds (also known as Deeds of Trust)
b) Mortgages
2) Involuntary
Liens created involuntarily. Only the particular property can be used to
satisfy debt. Other assets cannot be looked to for satisfaction.
a) Mechanics Liens
b) Property Taxes

34

2. Creating Debt Instruments

a. Essentials to Create a Negotiable Instrument
1)
2)
3)
4)
5)
6)

In writing;
Signed by the maker;
A Promise (e.g. - Promissory Note);
Payable to another;
For an exact amount;
Payable to named party or bearer.

b. Parties to a Negotiable Instrument

1) Maker/Payor (promisor) - Giver of promise to pay.
e.g. - One who writes a check or promissory note.

2) Payee - Receiver of payment or promise to pay.

e.g. - Beneficiary, Mortgagee, Lender, etc.

c. Types of Negotiable Instruments (Convertible into money)

1) Orders to Pay (On demand or fixed future date)
a) Personal Checks
b) Company Checks
c) Cashier's Checks
d) Certified Checks
e) Bank Drafts
f) Bills of Exchange
2) Promises to Pay (Payable at a fixed future date)
a) Promissory Notes

3. Methods of Collection on Personal Debts (Liens and Execution)

a. Legal Action Filed Against the Borrower/Debtor.
b. File an Attachment Lien (Optional)
1) Writ of Attachment issued prior to a judgment. The intention is to hold property
so that it cannot be disposed of, and is available in event of a successful
judgment.
2) Attachment Lien effective 3 years (may be extended).

c. Lis Pendens Notice (Litigation Pending)

Gives public notice of pending court action. This has the effect of providing notice
to those who may intend to acquire an ownership or security interest in the
property that the property is being held subject to a pending litigation.

d. Obtain a Judgment against Borrower/Debtor (Abstract of Judgment).

Written decision of the court, stamped with the time and date of the entry of the
judgment.

35

f. Create A Lien
Record Abstract of Judgment in County where debtor owns real property.
This creates a lien on all real property owned in that county by debtor. Judgment
liens are effective for 10 years from date entry of judgment made by court. May be
extended additional 10 years.
g. Writ Of Execution Obtained - Court order instructing sheriff to sell property.

4. Extinguishing Judgment Liens

a. Lapse of time
10 years passes. If not extended, judgment becomes ineffective.

b. Satisfaction
Debt satisfied and/or released.

c. Voluntary Release
Lien holder gives up lien rights.

5. Specific Liens (Voluntary) - Using Trust Deeds or Mortgages

Voluntarily securing a debt using real property.

TRUST DEEDS & MORTGAGES

Essential Characteristics
Trust Deeds

Mortgages

Name of Lender
(Receives note and security)

Beneficiary

Mortgagee

Name of Borrower
(Gives note and security)

Trustor

Mortgagor

Name of third party

Trustee
(Represents the Beneficiary)

No third party

Purpose of Lien Instrument

To create a lien
(Security for the loan)

To create a lien
(Security for the loan)

Purpose of Note

Evidence of debt
(Negotiable instrument)

Evidence of debt
(Negotiable instrument)

Title of property

Passes from
trustor to trustee

Remains solely
with mortgagor(s)

Releasing the recorded lien

*Deed of Reconveyance
(Signed by Trustee)

*Satisfaction of Mortgage
(Signed by Mortgagee)

*Must be recorded to relieve property of burden.

36

FORECLOSURE PROCEDURE
TRUST DEED

MORTGAGE

Step 1 - Record Notice of Default

File Legal Action in Court

Acquire "Order of Sale" from Court.
Borrower can reinstate prior to issuance of
the order.

Step 2 - Publish Notice of Trustee's Sale

Notice of sale published 3 times,
7 days apart within 20 days in county
where sale will occur. Borrower may
reinstate anytime 5 days prior to
actual sale.

Step 3 - Trustee's Sale held

Trustee exercises "Power of Sale".

Step 4 - Bids must be all cash

Except party foreclosing may bid
up to amount owed them.

Step 5 - Trustee's Deed

Publish and Post Notice of Sale

Notice of Sale posted in a public place and on
the subject property. Notice of Sale published
at least once a week over a 20 day period in
county where sale will occur.

Court holds Foreclosure Sale

Sale held by an officer of the court.

Bids must be all cash

Except party foreclosing may bid
up to the amount owed to them.

Certificate of Sale

Signed by Trustee
Given to successful bidder.

Step 6 - Redemption Period

None

Given to the successful bidder.

Borrower may retain possession, but
required to pay rent.

Redemption Period
3 months after sale if no Deficiency sought.
1 year after sale if lender seeks a Deficiency.
If borrower redeems by paying certificate
holder plus interest, certificate holder will not
receive deed to property.

Step 7 - No additional steps

Sheriffs Deed given to Certificate holder

(If not redeemed by borrower.)

DISPOSITION OF THE SALE FUNDS

Deed of Trust: Trustee's fees, property taxes, federal liens, costs, sale expenses, debt
owed beneficiary, junior lien holders, and balance if any, to trustor (borrower).
Mortgage: Cost of law suit and attorney fees, selling expenses, property taxes, federal
liens, amount due mortgagee (lender), junior lien holders, if any, and balance, if any, to
mortgagor (borrower).

37

TERMS RELATING TO MORTGAGES OR TRUST DEEDS (Deeds of Trust)

Blanket Encumbrance: More than one parcel held under the same lien instrument.
Deed In Lieu Of Foreclosure/Sale: Borrower (mortgagor/trustor) agrees to deed
property back to the lender (mortgagee/beneficiary) rather than having the property sold
or foreclosed upon.
Deficiency Judgment: If property should bring lender less than amount due, lender might
ask court for a judgment for the difference between what they were due and what they
received. Deficiency judgments, when recorded create a general lien (unsecured personal
debt).
Note: Due to California Anti-Deficiency Laws, no deficiency judgments are allowed for the
following types of loans made for the purpose of purchasing the property (Purchase Money
Loans):
a. Owner carry-back financing;
b. One to four unit properties, owner-occupied, all borrowed money used to purchase.
c. Foreclosures not judicially processed. e.g. - Trustee's Sale

Reinstatement (Before sale): A period of time granted by law in which borrower may
bring loan current by paying past due amounts plus costs.
Redemption (After sale): A period of time in which the court allows borrower to recover
property by paying off entire loan balance plus costs.
Fictitious Deed of Trust: A master copy of the deed of trust is recorded in specific
county or counties. Reference is made to this document in a "Short Form Deed of Trust."
Short Form Deed of Trust: Usually a one page document that indicates that the
standard clauses are pre-recorded on public record (fictitious deed of trust). In this way
only a one page document need be recorded, not 3 or 4 pages.
First Loans: The first recorded loan secured by real property (Primary/Senior).
Junior Loans: Any recorded loan secured by real property after the first.
Request for a Notice of Default: Recorded by a junior lien holder. Requires any senior
lien holder recording a Notice of Default to advise junior lien holders of the recorded
notice.
Note: If a senior loan is in default, a junior lien holder may cure the default by bringing
payments current, then may add amounts paid to loan balance due them. If unpaid, junior
lien holder may file a notice of default against borrower and proceed to foreclose on their
junior loan.

Beneficiary's Statement: Issued by a lender indicating the current condition of the debt
on the property. Cannot be released to anyone without the permission of the borrower.
(Do not confuse with Offset Statement)

Offset Statement: When selling a note secured by a trust deed or a mortgage, the
condition of the debt is disclosed in this statement by the property owner to the one being
assigned the note.
38

"Assumption of" the Existing Loan

New buyer agrees to take over liability for payment of loan existing on property. In the
event of foreclosure and a deficiency judgment exists, the assuming party is held
primarily liable for the deficiency. The original borrower is secondarily liable unless
specifically released in writing.

"Subject to" the Existing Loan

New buyer purchases property and, although existing loan remains on property, does not
assume loan liability. In event of foreclosure and a deficiency judgment exists, original
borrower has total liability, new buyer has none.
Open-End Loan
According to terms, lender may advance additional sums of money without need of
paying off the existing loan. As a result there will be no need to issue a deed of
reconveyance, therefore lender does not relinquish their recording priority.
Lock-in Loan
Each payment must be paid as it becomes due. No prepayments allowed. No additional
sums can be advanced to borrower.

CLAUSES FOUND IN NOTES, TRUST DEEDS AND MORTGAGES

Acceleration Clause
Any clause calling a note due and payable (acceleration of payment) upon certain named
event(s) occurring. e.g. - The non-payment of property taxes or fire and casualty
insurance.
Alienation Clause (Alienates Right, Title or Interest)
A type of Acceleration Clause that calls the note due and payable upon the transfer or
conveyance of title of the property...Sometimes referred to as a "Due On Sale" Clause.
Assignment of Rents Clause
Assigns to lender the right to collect rents on properties they hold as security for payment
on a loan if loan payments become delinquent.
Or More Clause
Permits borrower to pay a certain amount "Or More", which would allow the prepayment
of the loan balance before the specified due date. However, as the terms permitted
larger payments, the borrower could not be charged a prepayment penalty.
Release Clause
Used in "Blanket Encumbrances". One or more parcels are released as predetermined
sums of money are paid to lender. A "Partial Reconveyance Deed" is used to release
individual parcel(s) if a trust deed is used as security for the loan. The best parcels
usually held to be released last, being more valuable and providing lender greater
security in the event borrower defaults.

39

Subordination Clause
Specifies loan will take a lesser priority, although recorded prior to another lien.
e.g. - May be utilized to acquire construction loan where prior loan exists. First recorded lien
holder subordinates their loan to the construction loan, giving construction priority.

CONSTRUCTION LOANS
Loans acquired for the purpose of constructing improvements on real property.
These are loans limited to short pay off terms and are used for purpose of construction.
Normally for terms ranging 6 to 18 months. Long term loans called "Take-Out Loans" are
used to "take-out or replace" the construction loans
e.g. - A short-term loan is acquired to construct improvements in a subdivision tract.

Construction Loan
Short-Term (Interim) financing
Take-Out Loan
Long-Term financing

MECHANIC'S LIENS
(Specific - Involuntary)
These liens are created to collect money owed for labor and/or materials supplied which
have contributed to the improvement of the real property. The lien can be executed only
against the real property or properties on which improvements are made or work was
actually performed (Specific Lien). The lien is recorded showing a charge against the
subject property and must be acted on within a specified time in order to collect unpaid
amounts due.

A. To Create a Mechanic's Lien

Must record a verified and notarized claim at the Office of the County Recorder in
the County wherein the property is located.

B. Priority Over Other Liens

(Scheme of Improvements)

Date first physical evidence of work performed dictates priority; not date lien
recorded. Sets priority date for all mechanics on that project.
Exception - Mechanics who have not served owner with a Preliminary Notice.

C. Class Of Claimants
1. Contractors (Original) - Owner hires directly to perform work.
2. Sub-Contractors - Hired through original or general contractor.

D. Examples of Claimants
1. Architects, Surveyors, etc.
2. All classes of contractors/sub-contractors (e.g. - plumbers, electricians, etc.)
3. Suppliers of materials (e.g. - lumber, concrete, wiring, etc.)

40

E. When Lien Must Be Recorded To Be Effective

1. If Notice of Completion Filed By Owner
Indicates the work contracted for has been completed. If the "Notice of
Completion" recorded, the following periods are given to file a valid Mechanic's
Lien:
Original Contractor - 60 Days
Subcontractors/Other Claimants - 30 Days
2. If No Notice of Completion is Filed By Owner
Equivalence of completion determined by;
a. Occupation or use by the owner together with cessation of labor.
b. Acceptance of the work by the owner.
c. Cessation of labor for 60 days.
d. Cessation of labor for 30 days after owner files a "Notice of Cessation".
The following periods are given to file a valid Mechanic's Lien.
Original Contractor - 90 Days
Subcontractors/Other Claimants - 90 Days

F. Foreclosure Rights
1. In order to use foreclosure as a remedy an Action for Foreclosure must be filed
within 90 days from date of recording of the Mechanic's Lien.
2. If Foreclosure action is not filed within the statutory 90 day period:
a. The right to foreclose is lost under the Mechanic's Lien.
b. Claimant may file a separate law suit.
c. The Judgment, if obtained and recorded, would create a general lien, which
could be foreclosed upon.

G. Owner's Protection against Mechanic's Liens

Notice of Non-Responsibility
Owners may protect themselves against unauthorized work performed on their
property by taking the following steps within 10 days of the date they discover the
unauthorized work has been performed.
1. Record Notice of Non-Responsibility at the office of the County Recorder, and;
2. Post a Copy of Notice of Non-Responsibility conspicuously on the property.
Important - Both recording and posting must be done

41

HOMESTEADING - DECLARATION OF HOMESTEAD

(Not an encumbrance-Provides a protection against forced sale of residence)

A. Purpose: A California Law that allows an owner to protect their home from
foreclosure sale resulting from unsecured judgment liens up to specified
limited sums.
Note: Do not confuse with the Federal Homestead Act of 1862 that was enacted to allow
for the acquisition of real property.

B. Provides Protection Against Unsecured Judgments

1.
2.
3.
4.

Personal Injury suits

Property damage liabilities
Business obligations
Personal debts

C. No Protection Provided Against Secured Judgments

1. Voluntary liens - Trust Deeds or Mortgages.
2. Involuntary liens - Mechanics Liens or Tax Liens.
3. Unsecured liens recorded before the homestead.

D. Current Exemptions
1. Age 65 or older or disabled (unable to work):
2. Head of Household or Married Couples:
3. All others:

$100,000
$ 75,000
$ 50,000

E. Creating a Valid "Declaration of Homestead"

1. Description of property is required
(Does not have to be a legal description).
2. Claimant must be residing on the premises claimed.
3. Claimant must claim described premises as their residence.
4. Claimant's Status declared:
a. 65 years of age or older or Disabled.
b. Married (husband and/or wife).
1) May be signed by the husband and/or wife.
2) If only one signing other spouse must be named.
c. Head of household.
d. Single or unmarried.
5. Must be recorded.
To be effective recording must be in the county where residence is located.

42

F. Eligible Property
Only one property may be homesteaded at a time.
1. If married, filing may be done by;
a.
b.
c.
d.

Husband and/or wife on any co-owned property

Husband on his separate property
Wife on her separate property
Husband or wife on their spouse's separate property

G. Protecting Equity If Homesteaded Property Is Sold

1. Equity protected from creditors if transferred to another home within 6 Months.

H. Forced Sale of Homesteaded Property.

1. If equity exceeds exemption amount, creditors may force sale of property.

Example
If one holding a judgment for $3,000 is asking for an execution sale
Head of Household - $75,000 Exemption
PROPERTY "A"

Market Value
Loan Balance (Secured Liens)
Equity
Exemption (to owner)
Available to Unsecured Creditors
Paid to Unsecured Creditors
Balance, if any, to Property Owner

$160,000
$100,000
$ 60,000
$ 75,000
-0Nothing
-0-

PROPERTY "B"

$160,000
$ 75,000
$ 85,000
$ 75,000
$ 10,000
$ 3,000
$ 7,000

Outcome: Property A - No forced sale, as not enough equity.

Property B - Could be sold. Creditor gets $3,000, owner gets remainder.

I. TERMINATING A HOMESTEAD
1. Sale of property (Title transferred to another).
2. Filing a "Declaration of Abandonment of Homestead".

J. WILL NOT TERMINATE A HOMESTEAD

1. Improvements partially or totally destroyed by fire.
2. Moving from the premises. e.g. - Property not sold, but leased to another.

K. HOMESTEADS ARE NOT EFFECTIVE AGAINST MECHANIC'S LIENS

Even if a Declaration of Homestead has been recorded previous to a Mechanic's
Lien, the Mechanic's Lien will take priority due to voluntary action by owner.

43

44

Chapter 3
____________

REAL ESTATE PRACTICE

THE DEPARTMENT OF REAL ESTATE
THE REAL ESTATE COMMISSIONER
COMMISSIONER'S REGULATIONS
THE REAL ESTATE LAW

I. THE DEPARTMENT OF REAL ESTATE

An agency of the Department of Business, Transportation, and Housing Agency.

A. Purpose: To enforce California Real Estate Laws.

B. Maintains Real Estate Accounts For Education, Research and Recovery.
The Department of Real Estate is a self supporting agency, supported by collected
fees. Of fees collected, a portion is required to be placed into two separate
accounts:
1. Education & Research Fund
Earmarks funds for real estate Education and Research.
2. Recovery Fund
Underwrites the payment of uncollectable judgments against insolvent
licensees for amounts limited to:
a. $20,000 per each individual claim
b. $100,000 maximum (total claims) per licensee

C. HEAD OF THE DEPARTMENT OF REAL ESTATE

1. The Real Estate Commissioner
a. Appointment
Made by the Governor. A pleasure appointment (No specific term).
b. Salaried
Serves as an employee of the State of California.
c. Works under the authority
Transportation and Housing

of

d. Legal advisor to the Commissioner

The State Attorney General.
45

the

Secretary

of

Business,

e. Appoints an Advisory Commission of 10 Members

1) Each is a pleasure appointment.
2) Members not salaried. Receive travel expenses only.
3) Must meet Quarterly (every 3 months).
4) 4 Members - "Public Members".
6 Members - "California Real Estate Brokers".
5) Commissioner presides.
f. Commissioner has no authority to make judgments regarding:
1) Commission disputes between agents.
2) Adjudging the legality of real estate contracts.

D. INVESTIGATIONS AND/OR LEGAL ACTIONS

Commissioner has the power to investigate or bring legal actions regarding
violations of the Real Estate Law(s). Must act on written complaints.
1. Prosecution of violators
By the District Attorney in county where legal violation(s) occurs.
2. Sentencing and Fines
Levied by the court
3. Restriction, Suspension or Revocation of the Real Estate License
By the Real Estate Commissioner who;
a. Conducts hearings on violations of Real Estate Law(s) under provisions of the
Administrative Procedures Act;
1) Step 1 - Licensee may be served with an "Accusation" or non-licensee served
with "Statement of Issues".
2) Step 2 - Formal Hearing is required.
Decision may provide for;

License cannot be arbitrarily taken.

(a) Suspension (suspended use)

(b) Revocation (loss of license)
(c) Restriction (limited use) may be:
i.
ii.
iii.
iv.

Who agent represents;

What type of property may be sold;
Where agent may transact business;
Written Report to be supplied to the commissioner.

E. ADMINISTERING LICENSE EXAMINATIONS AND ISSUING REAL

ESTATE LICENSES AND PERMITS.
The License Law states: "It is unlawful for any person to engage in the business,
act in the capacity of, advertise or assume to act as a real estate broker or
salesperson within California without first obtaining a real estate license."
46

1. TYPES OF LICENSES ISSUED - Broker

A person, either legal (a corporation) or natural who, for

compensation or in expectation of compensation, regardless of form
or time of payment, does or negotiates to do, one or more of the
following acts for another or others:
a. Sells or offers to sell, buys or offers to buy, solicits prospective sellers or
purchasers or, solicits or obtains listings or, negotiates the purchase, sale
or exchange of real property or a business opportunity.
b. Leases or rents or offers to lease or rent, or places for rent, or solicits
listings of places for rent, or solicits for prospective tenants, or negotiates
the sale, purchase or exchange of leases on real property, or on a business
opportunity, or collects rents from real property, or improvements thereon,
or from business opportunities.
c. Assists or offers to assist in filing an application for the purchase or lease
of, or in locating or entering upon, lands owned by the state or federal
government.
d. Solicits borrowers or lenders for, or negotiates loans or collects payments
or performs services for borrowers or lenders, or owners of notes in
connection with loans secured directly or collaterally by liens on real
property or on business opportunities (See Articles 5, 6 and 7).
e. Sells or offers to sell, buys or offers to buy, or exchanges or offers to
exchange a real property sales contract, a promissory note secured directly
or collaterally by a lien on real property or on a business opportunity, and
performs service for the holders thereof (See Articles 5, 6 and 7)
f. Engages as a principal in the business of buying from, selling to, or
exchanging with the public, real property sales contracts, promissory notes
secured directly on tracts, or promissory notes secured directly or
collaterally by liens on real property, or makes agreements with the public
for the collection of payments or the performance of services in connection
with real property sales contracts or promissory notes secured directly or
collaterally by liens on real property (See Articles 5,6 and 7).
g. Engages in the business of claiming, demanding, charging, receiving,
collecting or contracting for the collection of an advance fee in connection
with any employment undertaken to promote the sale or lease of real
property or of a business opportunity by advance fee listing, advertisement
or other offering to sell, exchange or rent property or a business
opportunity, or to obtain a loan or loans thereon.
(List continued on the following page)
47

(List continued from the previous page)

h. Issues or sells, solicits prospective sellers, or purchasers of, solicits or

obtains listings of, or negotiates the purchase, sale or exchange of
securities as specified in the Corporations Code (Doesn't apply to a brokerdealer or agent of a broker-dealer
licensed
by
Commissioner
of
Corporations-See Articles 5, 6 and 7).
i. Sells or offers to sell, buys or offers to buy, solicits prospective purchasers
of, solicits or obtains listings of, or negotiates the purchase, sale or
exchange of any mobilehome only if the mobilehome has been registered
according to the provisions of the law (See Mobilehome Laws).

2. TYPES OF LICENSES - Real Estate Salesperson

A natural person (cannot be incorporated), who, to perform duties for
which a license is required, must be employed by a Real Estate
Broker.
A salesperson may not act independent of their broker.
Anything the broker can do by law, they (the broker) may authorize
their salespersons to do for them.
a. Obtaining a Salesperson's License
1) Pass the license examination
a. Must be taken and passed.
b. May not be waived.
2) Make application for license
Must be done no later than "1 year" from date of taking the license
examination. Must provide proof of being:
a) 18 Years of age;
b) Truthful and honest;
c) Must pay required fee.
d) License issued for a 4-year term
Informational for new salesperson licensees. You will be required to provide proof
of completion of "Two" specific 3-unit college-level courses or course equivalents
within 18 months of issuance of your license. Additionally, prior to renewing your
license after the first 4-year term you will be required to complete 3 hours each of:
Ethics & Legal Conduct, Agency, Trust Fund Handling and Fair Housing (total 12hours), to meet the Continuing Education requirement in order to renew your license
for the next 4-year term.

3) Expiration of License.
Valid if kept active for a 4-year term. Expires if not renewed.
a) If expired can do nothing for which a license is required until license
Is renewed.
b) Two year late renewal term is granted for expired licenses. If the
two-year period passes without renewal, all rights of renewing are
forfeited.
48

CALL US ABOUT COURSES TO MAINTAIN YOUR SALES AND BROKER LICENSES

PRIOR TO APPLYING FOR YOUR SALES LICENSE CALL TO SEE YOU CAN SAVE
$45 OFF THE REGULAR LICENSE APPLICATION FEE.
(510) 568-6460

3. Corporate Broker License

a. A corporation is a "Legal Person".
b. Must provide Commissioner with Articles of Incorporation.
c. Proof that one officer is licensed as a Real Estate Broker.
d. License is issued in name of corporation.
e. If corporate broker/officer dies, must cease activities, but contracts still
binding.
f. Upon replacement of corporate broker/officer may, continue to operate.

4. Mineral, Oil and Gas Broker License

As of January 1, 1994, representing parties as a agent for the purpose of
performing activities which are relative to Mineral, Oil as Gas transactions has
been integrated into activities allowed for those who hold a valid and active
Real Estate Broker's License. It is not longer necessary to hold a separate
Mineral, Oil and Gas Broker License or to acquire permits for these activities.

5. Branch Office License

If a brokerage maintains more than one office location, one is the Main Office,
the other(s), "Branch Offices".
a. Separate license required for each Branch Office.
b. Licenses of agents representing the broker, although they may work at
branch office locations, must be available for inspection at the Main Office.
c. Branch office managers who review, sign and initial incoming agreements
on behalf of their broker must be competent to do so. Broker has
responsibility to make that determination. No specific experience required
by law.

6. Partnership
Partnerships exist, but the Department of Real Estate no longer issues a
partnership license. To have a partnership:
a. At least one of the partners must be a licensed real estate broker.
b. Unlicensed partners may participate in profits.
c. If any partners wish to perform activities for which a real estate license is
required, must first obtain a sales or brokers license.
49

7. LICENSE LAW DOES NOT REQUIRE LICENSE IF;

a. Real Estate Appraiser
No State license required.
NOTE: State has licensing agency to meet current federal mandate
requiring licensing for appraisals where federal government is affiliated in
any manner with money being loaned.

b. Anyone dealing in their own properties

No limitation.

c. An Attorney at Law
When representing a client as an attorney, in the capacity of an attorney.
i.e. - Cannot solicit for listing or sale of real property on behalf of a client.

d. A Trustee
When selling property under terms of the Power of Sale Clause of the Trust
Deed.

e. Acting under a Court Order

i.e. - An officer of the court holding a foreclosure sale.

f. Acting under a properly executed Power of Attorney

A written document in which a:
1) Principal gives authority to another to sign or act on their behalf.
2) Attorney-In-Fact receives authority from the principal to sign for them
or act as them (act in their place).
Example of signing:
Principal's Name
John J. Jones

Attorney in Fact's Signature

by Cyndi Johnson,

Capacity
as Attorney-in-Fact

a) Facts to remember;
(1) Power of Attorney should be recorded to be effective if used in a
real estate transaction.
(2) Termination by;
(a) Death of either party;
(b) Mental incompetency of either party;
(c) Revocation by Principal.
(3) Attorney-In-Fact may sign anything over to themselves, if
authorized by the Principal.
(4) A homesteaded property can be conveyed by use of a Power of
Attorney
50

COMMISSIONER'S REGULATIONS
The Commissioner's Regulation's although not law, have the same force and effect of law.
The following are regulations, not laws. In the event of a violation, the agent may be
subject to suspension or revocation of their license. If the matter is also a violation of the
law, then civil suits and/or criminal charges may additionally be brought against the
agent.

I. BROKER MAY PERFORM AN ESCROW

(Banks, savings & loans and attorneys may also do so)
A. Broker acts as escrow holder. Salespeople may perform acts for the broker with
broker's authority.
B. May perform only if broker has been acting as agent of the buyer and/or seller in
the transaction for which escrow is being performed.
C. Both parties must agree on the selection of the broker.
D. Broker may not solicit for escrow business.
E. Broker is entitled to a separate fee for escrow duties, if agreed upon.
F. Broker required to notify both parties in writing within one month after close of
transaction of exact selling price.

II. BROKER'S RESPONSIBILITY FOR/TO EMPLOYEES (SALESPEOPLE)

A. Proper Supervision
Broker may be held responsible for actions of their sales agents where supervision
was considered improper.
Although not in regulations, broker is accountable for violations of law, and may also be
subject to:

B. Civil Suits - Broker may be held solely or jointly liable for actions and representations
of their sales agents, should those acts or misrepresentations cause their clients
proven damages.
C. Criminal Charges - Only the party or parties who have been aware of, performed
or participated in the criminal activity would be held legally accountable.

III. TRUST ACCOUNT

A. Though not required either by law or regulation, if broker elects, they can create
and maintain a separate account for collected funds from clients/customers.
B. Broker (not salesperson) is trustee of the account.
Can authorize in writing another to handle account, but remains primarily responsible (See G.)

51

C. Records must be maintained for 3 years.

D. Generally one account. Separate entries made for each deposit/withdrawal.
E. Proper records must be maintained even if funds not placed into account.
e.g. - Any uncashed checks held pursuant to acting on instructions of principal.

F. Broker may maintain up to $200 of their own funds in the account. Allows account
to remain open and covers any service charges.
G. Withdrawals from account may be made with broker's authorization by;
a. OFFICER of a real estate corporation;
b. SALESPERSON employed by broker;
c. UNLICENSED EMPLOYEE (Fidelity Bond required. At least equal to amount to be handled).

H. Usually a non-interest bearing account. If interest is paid, must be accounted for

and given to client.
I.

Must be with an insured institution that allows for immediate withdrawal of funds.

J. Account records must be reconciled (balanced) with a monthly statement provided

by the institution where account is maintained.

VI. TRUST FUNDS

Funds handled by an agent, which are those of a client.
A. IF GIVEN WRITTEN INSTRUCTIONS (on handling of the funds)
Agent is required to follow instructions and advice principal of such instructions.
B. IF NO INSTRUCTIONS ARE GIVEN
Agent must do one of the following with the funds by the close of the third
business day or agent would be considered guilty of "Commingling" (See I. A. 5. next
page).
1. Give to their Principal (person they represent);
2. Place in Escrow; or a neutral depository, or;
3. Deposit in Broker's Trust Account (if one is maintained).

C. IF MONEY IS PERSONALLY USED BY AGENT

Agent guilty of "Conversion". Results in:
1. Grounds for Civil Suit for recovery;
2. Criminal charges may be brought; and/or
3. Commissioner may suspend or revoke agent's license.

52

REAL ESTATE LAWS

Laws are enacted through the State Legislature or by an initiative vote of the
people of the State of California (The commissioner cannot enact laws, but may
make regulations).
I.

There are two basic laws which may lead to the possible suspension or revocation of
a license. Violation may be grounds for civil action or criminal charges to be brought
against the agent.

A. LAWS INVOLVING LICENSEE ACTING AS AN AGENT

1. Using fraud, making misrepresentations or false promises or deceiving a
client.
2. Divided Agency
Acting as agent for more than one party in a transaction without full consent
and knowledge of all involved.
e.g. - Agent represents both buyer and seller where full disclosure has not been made by
agent. If disclosure were made, it would represent a legal "Dual Agency".

3. Secret Profit
Any profit derived from agency not fully disclosed to agent's principal(s).
4. No Definite Termination Date on an Exclusive Listing instrument used to buy,
sell or exchange real property or for the listing of a business opportunity.
5. Commingling
Improper handling of a client's trust funds

B. OFFENSES NOT INVOLVING AGENCY

Under certain circumstances also pertains to non-licensees

1. Obtaining a Real Estate License by fraud or deceit.

2. Misuse of the term "Realtor" or any other trade name where the licensee is not
a member.
3. Willful disregard of real estate license laws relating to;
a. Negligent supervision or acts
b. Misuse of government information
c. Violation of restricted license
d. Untruthfulness and dishonesty
e. Other dishonest conduct
f. Acts of discrimination (examples)
Blockbusting - Inducing panic selling based on loss of value, increase in crime
or decline in quality of schools resulting from entry into the neighborhood of a
person or persons of another race, color, religion, ancestry or national origin.
Steering - Directing persons to or away from a property based on any
discriminatory practices.
53

C. AREAS OF CONTROL BY THE DEPARTMENT OF REAL ESTATE

1. Articles 5, 6 And 7 Of The Real Estate Law

a. ARTICLE 5
Transactions which involve buying/selling of notes secured by Trust
Deeds or Mortgages on real property, or buying/selling of "Real Property
Sales Contracts.
1) Real Estate Broker License required when:
a) Negotiating loans for another;
b) Acting as an agent in the sale or exchange of notes secured by trust
deeds or mortgages or real property sales contracts;
c) Making collections on more than 10 loans per year, or in amounts
exceeding $40,000 per year.
2) Requirements:
a) Broker must have written authority to handle funds placed with them
by a client for purchase or continual purchase of loans secured by
real estate.
b) Must provide Mortgage Loan Disclosure Statement to borrower and
obtain borrower's signature on statement prior to the time borrower
becomes obligated to complete the loan. Copy must be retained for
three years.
c) Loan funds cannot be disbursed prior to recording of deed of trust,
unless specifically authorized by lender.
d) If loan funds are disbursed prior to recording of deed of trust, then
within 10 days, broker must do one of the following;
(1) Have the trust deed recorded; or
(2) Send written recommendation that lender have it recorded.

e) An Annual Report and Trust Fund Status Report are required within
90 days of end of broker's fiscal year, if broker intends or expects in
any 12 month period, to negotiate 20 or more loans and/or aggregate
in an amount of more than $2,000,000 in any combination.
f) All advertisements must be submitted for approval at least 10 days
prior to publication.
g) Must conform to Article 7 of the Real Estate Law, if;
(1) Owner takes-back loans in more than seven real estate transactions in
a calendar year; or
(2) Acting as agent in the negotiation of first loans less than $30,000 or
junior loans less than $20,000.

54

b. ARTICLE 6

Real Property Securities

1) Types of Securities:
a) Out of State Subdivisions offered for sale in California.
b) Sale of Promotional Notes
The usual purpose of these notes is to use them to promote the sale
of the property (promotional) and then to sell the notes to generate
immediate cash. These are notes not held over three years, and are
secured by:
(1) Unimproved Land;
(2) Improvements on the land, but before the first sale takes place; or
(3) Being taken as first financing, but are subordinate (usually to a
construction loan).

c) Real Property Sales Contracts

Contracts which are not kept for over three years, and are held against
separate parcels in a subdivision.

d) Guaranteed Notes or Guaranteed Sales Contracts

Guaranteed means any of the following:
(1) A guarantee against loss;
(2) A guarantee that principal and interest will be paid;
(3) The broker will assume any payments to protect the security of the note
or contract;
(4) A guarantee of a specific yield or return on the note or contract;
(5) A guarantee to repurchase the note or contract if necessary.
(License and special endorsements required if sales are made to the
general public).
(a) License required: Real Estate Broker
(b) Endorsement required: Real Property Security Dealer
(c) To obtain the endorsement on the license, broker must:
i.

Pay $100 Fee (renewed with license)

ii. File a $10,000 Surety Bond

55

2) Miscellaneous Information Regarding Securities

(a) Obtain a permit for each security or series of securities sold.
(b) No license or permit required if sales are not to the general
public.
Examples: Sales to Attorneys, Contractors, Institutional Lenders, Real
Estate Licensees, etc.

(c) Security Dealer Disclosure Statement Required.

Provides pertinent facts regarding the purchased security. Copy of
delivered statement must be retained by broker for three years.
(d) Appraisal Report Required.
Broker must provide, along with the disclosure statement, an
appraisal report. Appraisal can be performed by independent fee
appraiser or broker.
(e) Advertising the Sale of Securities.
(1) All advertising must be submitted to the real estate commissioner for
approval at least 10 days prior to use.
(2) No advertising of any premium, gift or other inducement to prospective
client(s).

c. ARTICLE 7

Real Property Loan Law

Created as a supplement to existing laws for added protection against
abusive lending practices regarding costs, fees and commissions.

Sets Limitations on Commissions and Expenses

Applies to loans created to refinance existing loans, or used to borrow using
real property as security for the loan. Does not apply to "Purchase Money
Loans"; e.g. - Owner carry-backs or third party cash loans used to finance the
actual purchase of real property.
1) Limitations on Commissions:
First Recorded Liens (First Loans)
(Law governs loans less than $30,000)
Loan term of Less than 3 years
Loan term of 3 years of more

5%
10%

Junior Loans (Those other than the first)

(Law governs loans less than $20,000)
Loan term of Less than 2 years
Loan term of 2 years, but less than 3
Loan term of 3 years or more

5%
10%
15%

56

(2) Limitations on Expenses:

Broker is entitled to charge the borrower the following;
(a) The proper rate of commission;
(b) Actual title fees;
(c) Actual recording fees; and
(d) Other expenses incurred, based on the following formula:
"Either 5% of the loan amount or $390, whichever is the greater of the
two. In no event can the amount determined in the first step ever exceed
the sum of $700, and in no event can the amount of expenses charged
ever exceed the actual expenses incurred."
Applying the formula
Step 1 - Match 5% of loan amount against $390. Enter the greater figure
$________
Step 2 - If figure in Step 1 is greater than $700, then enter $700 here. If not, leave blank
$________
Step 3 - Determine actual expenses.. If less than those in step 1 or 2, charge actual expenses $________

EXAMPLE 1
Loan Amount
$4,000

EXAMPLE 2
Loan Amount
$16,000

Step 1 - Match 5% of loan amount against

$390; Select whichever is greater
of the two figures.

$200 OR $390

$800 OR $390

Step 2 - Use figure selected in Step 1 if

less than $700. If it exceeds $700,
then use $700 as maximum amount
allowed to be charged.

$390 or $700

$800 OR $700
(Exceeded the $700 Maximum)

Step 3 - Look at the figure selected in Step 2.

See if actual expenses are shown.
factual expenses are shown, should
they be less than the Step 2 figure....
then pass on actual expenses.

Maximum to be charged borrower

Actual Expenses
$147
$390 or $147
$147

57

Actual Expenses
$798
$700 or $798
$700

3) Other Requirements Relating to Article 7;

a) Mortgage Loan Disclosure Statement required
Note: Required for all loan transactions, even if they do not
have to conform to Article 7 commission and expense
regulations.
(1) Copy of form retained by broker for three (3) years.
(2) Form must be approved by commissioner.
b) Mortgage Loan Disclosure Statement not required
If broker places loan with institutional lender and limits commission to
2% or less.
c) Interest Rate limitation on loans placed through a real estate
broker"NO LIMITATION"
d) Loan Listings: Limited to a term of 45 days if agent has a signed
Exclusive Listing.
e) Borrower Fails to Consummate Loan: If broker locates lender,
should borrower change their mind, or should lender not grant loan
due to borrower lying on loan application, Broker is entitled to;
(1) Costs and Expenses; and
(2) 1/2 of the earned Commission.

f) Should Broker Charge More Than Set Rates.

(1) Borrower entitled to recover Treble (triple) Damages
(2) Contract is considered unenforceable
(3) Brokers license may be subject to suspension or revocation.

g) Balloon Payments
Definition:
A balloon payment is any payment more than twice any required
preceding payment including the last payment made.
Balloon Payments are not allowed on:
(1) Amortized loans of six (6) years or less on an owner-occupied
residence.
(2) Amortized loans of less than 3 years, if secured by any other type of
real property.

58

SUBDIVISION LAWS
Parcel Maps - Subdivision Map Act - Subdivided Lands Act

I. SUBDIVISION MAP ACT - Local Government Controls

Local governments (cities and counties) through Police Power, create ordinances and
restrictions to control the ultimate use of the land in their communities.

A. PARCEL MAP
Required for any subdivision of property into two (2) or more parcels where the
filing is not required by Subdivision Map Act.

B. SUBDIVISION MAP
Governs the division of improved or unimproved land for the purpose of sale, lease
or financing, whether immediate or in the future. Includes;
Divisions of 5 or more lots into contiguous parcels
5 or more condominiums
5 or more units in a Community Apartment Project
Conversion of dwellings into Stock Cooperative of 5 or more units
1. Administration and Enforcement
a. Incorporated areas (Cities) - City Council
b. Unincorporated areas (Counties) - Board of Supervisors
c. Submission of Plans - To local Planning Commission
d. Enforcement of State and Local Building Codes - Local building inspectors
2. Procedure
a. Tentative map submitted to local government.
b. Map is returned (approved or with recommendations).
c. Final engineered map drawn and submitted for approval.
d. Statutory Dedication. Areas such as; streets, parks, school sites, etc., may
be dedicated for public use by means of a dedication certificate(s).
Certificate(s) must be signed by land owner and dedication accepted by
designated public official.
e. Map approved.
f. Map and Dedications recorded. Upon their recording statutory dedication
process is completed.

59

3. Included in the Subdivision Map Act

a. Leasing of apartments, offices, stores or similar space in apartment,
industrial or commercial buildings;
b. Undivided interests;
c. Agricultural leases;
d. Time-shares;
e. Limited-equity housing cooperatives;
f. Leasing or financing or mobilehome or trailer parks;
g. Mineral, oil or gas leases;
h. Real property if:
1) Whole parcels before subdivision containing less than 5 acres and each
parcel abuts a public street;
2) Divided parcels of 20 acres or more with approved access to a public
street;
3) Parcels zoned industrial or commercial with approved access to public
streets;
4) Divided parcels of 40 acres or more (1/4 of a 1/4 of a section or larger).

C. SUBDIVIDED LANDS LAW (California Real Estate Law)

Governs the division of improved or unimproved land for purpose of sale, lease or
financing, whether immediate or in the future.
Covered by Subdivided Lands Law
5 or more lots or parcels (includes Planned Unit Developments)
5 or more condominium units
5 or more units in a community apartment project
5 or more shareholders in a Stock Cooperative
5 or more undivided interests (public offering)
Agricultural leases
Timeshares (12 or more interests in one property)
Limited-equity housing cooperatives
Exempt from Subdivided Lands Law
Lots divided into parcels of 160 acres or larger
1. PURPOSE: Prevention of Fraud
2. ADMINISTRATION: Real Estate Commissioner

60

3. PROCEDURE:
a. Submit completed Questionnaire to Real Estate Commissioner
1) Includes Notice of intent to subdivide; and
2) A tentative map of proposed subdivision.
b. Preliminary Report (Optional)
Used in anticipation of Final Report being issued.
1) Issued for a term of 1 year (renewable)
2) May accept reservations only. No sales.
3) If reservation fee taken, must be placed in escrow.
demand.

Refundable on

4) Preliminary Report will terminate:

a) If final report is issued during the year,
b) If new report is required as a result of material change, or
c) When the one year term expires and report not renewed.
c. Final Public Report Issued (Requirements completed)
1) Property can now be sold.
2) Valid for 5 years (or until material change occurs). Report is renewable.
3) Copy of report must be visible on wall of any On-Site Office.
4) Copy of report must be provided to:
(a) Any adult requesting a copy verbally or in writing.
(b) Any purchaser or prospective purchaser.
5) Receipt for public report must be signed by buyer and a copy retained
by seller/agent for 3 years.
d. Material Changes
Must be reported to Real Estate Commissioner if:
1) Sale or option of 5 or more parcels to one buyer,
2) Changes made in physical aspects or,
3) Changes in purchase or finance contracts or type of deed used.
e. Desist and Refrain Order
Issued by the Real Estate Commissioner to order immediate halt to any
reported (suspected) violations of any laws/provisions of the Subdivided
Lands Law.
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D. DESCRIPTIONS OF DIFFERENT TYPES OF SUBDIVISIONS

1. COMMUNITY APARTMENT PROJECTS
a. Share an undivided interest and ownership with other owners.
b. Have exclusive rights of use and occupancy of a designated unit within the
property.
c. One property tax bill provided. All owners responsible for payment.
d. Property Tax Liens and/or Mechanic's Liens are not placed against an
individual or individual's unit, but against the whole project.

2. STOCK COOPERATIVES
Same as Community Apartment Project except owned by a corporation, which
evidences occupancy rights by issuance of a stock certificate instead of a
deed.

3. CONDOMINIUMS
(May be for Residential, Commercial or Industrial use)

a. Ownership
1) Unit Space - Separate Ownership
Consists of "Inside Unpainted Wall", also defined as "Airspace of the Unit".
2) Common Areas - Shared with and by all owners
Not considered part of unit space, but is part of total ownership.
Examples: The land, swimming pool, clubhouse, exterior walls, walkways, outside
stairs, elevators, etc.

b. Effects Of Ownership
1) Homeowner's Association
a) Elected by property owners.
b) Collects dues, authorizes and pays for work on common areas.
2) Property Taxes
a) Individual unit - Billed separately by county. If unpaid, lien on unit only.
3) Mechanic's Liens
a) Individual unit - Placed against the unit.
b) Authorized by Association (Common Areas) - Placed against entire
complex.

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4. PLANNED UNIT DEVELOPMENT (PUD)

Defined as having a separate ownership in the land and sharing an undivided
interest in a common area(s) with other owners
a. Separate Ownership
The land & improvements on the land (if any) - Individual liability for
property tax or mechanic's Liens.
b. Common Areas
Planned areas - All owners liable for property tax or mechanic's liens.

5. TIMESHARES
a. Separate Ownership - Use or Ownership of a real property interest,
whereby time, either a specific day(s), or a right to occupy during a flexible
time period is granted.
e.g. - Ownership of July 1st through the 7th

b. Rescission Rights - Midnight, the third calendar day after signing purchase
agreement.

6. LAND PROJECTS
a. Requirements to be considered a "Land Project"
1) Type of land - Raw/undeveloped (Not improved with buildings).
2) Location - Contains less than 1500 registered voters within the
subdivision or within a two-mile boundary of the subdivision.
3) Number of parcels - 50 or more
4) Highly promotional - Direct mail advertising/promotional gifts
b Type of contract generally used - Contact of Sale
c. Rescission rights - 14 calendar days from date of signing Purchase
Agreement.
d. Defaults - Must be reported to real estate commissioner.

7. OUT-OF-STATE SUBDIVISIONS
May fall within jurisdiction of Housing & Urban Development (HUD) Interstate
Land Sales Registration Division (ILSRD)
ILSFA (Interstate Land Sales Full Disclosure Act) - name of disclosure act
OILSR (Office of Interstate Land Sales Registration) - Registration agency for effected
subdivisions
a. Number of parcels - 5 or more
b. Rescission rights - 48 hours (After receipt of the Property Report)
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MOBILEHOME SALES
(Manufactured Homes)

THE LAW
Real Estate Brokers may engage in selling or purchasing, offering to sell or purchase,
soliciting purchasers of, soliciting the obtaining of, or negotiating purchase, sale or
exchange of certain Mobilehomes registered with the proper agency; Department of
Motor Vehicles (DMV) or Department of Housing and Community Development (HCD).
1. Laws do not include:
a. Recreational Vehicles
b. Commercial Coaches
c. Factory Built Housing
2. The broker may not maintain a place of business in any location where "2 or more" mobile
homes are displayed and offered for sale, unless the broker is also licensed as a
"Mobilehome Dealer".
3. The mobilehome must be either in place on a lot rented or leased for human habitation
within an established mobilehome park, or located on a lot where it has authorized use for
an uninterrupted period of one year.
4. It is unlawful to fail to withdraw an advertisement of a mobilehome for sale within 48 hours
after receipt of notice that the mobilehome is no longer for sale, lease or exchange.
5. It is unlawful to advertise that "No Downpayment" is required, when in fact one is required.
6. To qualify, the mobilehome must be greater than eight feet (8) in width and forty feet (40)
in length.

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Chapter 4
________________

Agency - Contract Law - Contracts

AGENCY
I. PARTIES TO AN AGENCY
A. The Principal
1. Appoints primary agent.
2. Could be a buyer, seller or broker.
3. May grant a "Power of Attorney," giving agent ability to sign and or act as
them.
4. Gives agent authority to perform duties on their behalf:
a. e.g., Make verbal representations on their behalf.
(Liable for all verbal representations of their agent.)
b. All authorized actions.
(Liable for those actions expressly authorized or ratified.)
5. Liability of authority extends to subagents.
a. Primary Agent - Broker directly employed by principal.
b. Subagents - Primary agent's cooperating brokers.
c. Salespersons - Are neither agents nor subagents of the principal. They
are considered agents of their employing brokers.

B. The Agent
1. Receives authority to represent Principal (Usually Seller)
2. Owes Principal a "Fiduciary Duty".
a. To act in the highest good faith
b. Not to take unfair advantage
c. To disclose all pertinent information
(Pertinent - Agent not required to pass-on information considered
personal or discriminatory).
3. Owes third party (usually buyer) duty of "Fair and Honest Dealing".
a. Must disclose all known material facts.
b. Must not violate fiduciary duty to principal.

C. The Third Party

1. Allows agent to perform on behalf of the principal.
2. For purpose of the State Exam, usually the buyer.
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II. CREATION OF THE AGENCY

Actual Agency vs. Ostensible Agency (implied)
A. ACTUAL - Created between Principal and Agent
(Principal employs agent by written or verbal agreement)
1. To be enforceable, must be in writing (Statue of Frauds).
Exception: Leases for one year or less
2. Authority of the agent;
a. That authority principal knowingly confers upon agent or;
b. That which principal, due to lack of ordinary care, leads agent to believe they
possess.
B. OSTENSIBLE - Created between Principal and Third Parties
(An apparent authority-Not written or verbal, but rather displayed as a result
of actions)
1. Agent's Authority
The authority which a principal:
a. Intentionally leads a third party to believe the agent possesses or;
b. Due to lack of ordinary care, causes third parties to believe agent
possesses.
2. Creation of "Agency Responsibility"
a. By Ratification - Principal accepts unauthorized actions or representations.
1) Principal must ratify representations or actions in the same manner
(written or verbal) as would have been required to originally create the
agency or to authorize the action.
e.g., Agent acts as an agent without written or verbal authority, or agent acts outside
authority given, yet principal accepts these actions.

b. By Estoppel - Responsibility resulting from inability to use a defense in

court if defense claimed is contrary to previous actions.
e.g. - Agency agreement gives no authority to agent to accept deposit. Principal tells buyer
agent has authority to accept deposit. Agent takes deposit money and misappropriates.
Principal's claims no responsibility for agent's actions. Principal is estopped from claiming
no responsibility, as their claim is contrary to their previous action(s).

Simplification Of The Above

Actual Agency
An express (written/verbal) agreement exists between the principal and
agent.
e.g. - You and I have a verbal or written Agreement. Agency created by contract - Responsibility is
now based on the terms of our verbal or written agreement .

Ostensible Agency
What you lead others to believe I can do.
e.g. - I tell people that I'm your agent, you agree. Agency created by Ratification - Responsibility is
based on Estoppel (you cannot deny the fact that I am your agent).
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III. TERMINATION OF THE AGENCY

A. Agreement expires
B. Reasonable time period passes
C. Notice given by agent
D. Revocation by principal
E. Impossibility of performance (death/mental incompetency)
F. Extinction of the subject matter (property destroyed)

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CONTRACT LAW
CONTRACT: An agreement to do or not to do a certain thing.
I. CREATION OF CONTRACT
A. Express - Expressed in words, written or verbal.
B. Implication - Implied by actions or conduct of parties involved.

II. CONTENT OF CONTRACT

A. Unilateral - An agreement where one side makes promise(s) in exchange for the
other side performing an act or action (A promise for an act).
B. Bilateral - An agreement where one side makes promise(s) in exchange for the
other side making promise(s) (A promise for a promise).

III. MAKING OF A VALID CONTRACT

Four Essential Elements Required

_________________________________________________________________________________________________________________

Parties Capable Of Contracting

Mutual Consent
Lawful Object
Sufficient Consideration
A. PARTIES CAPABLE OF CONTRACTING
Everyone is fully capable of entering contract agreements except persons limited
by law.
LIMITATIONS:
1. Minors - Under age of 18 years old and not EMANCIPATED.
a. Valid Agreements (May be bound by agreements)
1) Those made on the minor's behalf by a court appointed guardian.
a) Parents are not guardians of minor's property unless court approved.
b) Guardian's transactions are subject to court approval.

b. Void Agreements (Not bound by agreements)

1) Minor employing an agent.
2) Minor entering into a real property contract.
c. Voidable Agreement (Subject to cancellation by minor)
Minor enters into, real property contract, then reaches age of majority.
1) Minor may disaffirm.
2) Adult may not disaffirm.

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2. Minors (Emancipated)
A person under 18 given the capacity of an adult for the purpose of entering
contract agreements, including those relating to real property.
Emancipation occurs as a result of:
a. A Valid Marriage -Even if later terminated.
b. Present Active Duty in any United States Armed Service
c. Receipt of a "Declaration of Emancipation"-Obtained from Superior
Court in the county of residence.

3. Mental Incompetency
a. Once court determines date of incompetency, any agreements entered into
on or after that date, would be considered void.
b. If no judgment has been made, agreements would be considered valid until
court adjudged.

4. Convicted Felons, while in prison

Ability to contract must be approved to;
a. Protect the security of the penal institution, or for
b. Reasonable protection of the public.

5. Aliens (Non-Citizens) and Non-Residents

a. May enter into contract, but must abide by California Contract Laws.
b. Aliens have certain limitations according to Federal Laws.

B. MUTUAL CONSENT
Also described as "Mutuality, "Offer and Acceptance" or "Meeting of the Minds".

1. Parties must enter agreements of their own free will, and must have
mutual understanding as to the terms of said agreements.
2. Defenses to Mutual Consent
a. Fraud
1) Actual
a) Misrepresentation of a material fact;
b) Suppression of a material fact;
c) Promise made with no intent of keeping it;
d) Positive assertion not warranted by current information, even if believed true.

2) Constructive
a) Any fraud that misleads, with no intent to deceive, yet gains an advantage.

69

b. Mistake
1) Of Fact: e.g., Wrong subject matter negotiated;
a) Either Non-existent, or Improperly Identified.

2) Of Law:
a) All parties must share the same misunderstanding.

c. Duress
The unlawful constraint exercised upon a person whereby they are forced
to do some act against their will; physical, mental or emotional.
d. Menace
Threat of committing duress or threat implying injury to person or
reputation.
e. Undue Influence
Taking unfair advantage while holding a position of trust.
e.g. - Guardian or Trustee.

3. THE OFFER
Offer must present a contractual intent. Contract terms must be Definite,
Certain, and should contain the following:
a. Name of parties
b. Identity of subject matter (describe property)
c. Full details of financing (Price and terms)
d. Time of performance (If none indicated, a reasonable period of time is determined)
e. Communication of offer to offeree

4. THE ACCEPTANCE
The offeree with knowledge of the offer, accepts it;
a. Under the exact terms of the agreement (No changes and no exceptions
are made).
b. Acceptance of offer communicated back to the Offeror:
1) By means specified in contract, or if no method indicated, by the usual method
for that particular situation.
Offeror can withdraw their offer anytime prior to being informed of acceptance.
e.g. - Buyer makes offer, seller accepts. Prior to communicating acceptance
buyer dies. There is no contract.

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C. LAWFUL OBJECT
Both consideration and purpose of agreement may not be contrary to law.
e.g. - Broker would be unable to enforce collection of commission earned, if earned while
their license was expired, suspended, or revoked.

D. SUFFICIENT CONSIDERATION
May be either:
1. Anything of value (money, exchange of property, etc.)
2. A promise to do or not do a certain thing;
a. Illusory promise - One which is not binding (an illusion), or
b. Non-Illusory promise - One which is binding (no illusion).

IV. LEGAL EFFECT OF CONTRACTS

A. Effectiveness of contract, if presented to the court might be:
1. Enforceable - Legally Effective (can be acted upon by court).
2. Unenforceable - Not Legally Effective (cannot be acted upon by court).
B. The condition of the contract may be:
1. VALID: Contains all necessary essentials.
2. VOID: Lacks one or more of the essentials necessary to create a contract;
therefore, is not effective as a contract.
3. VOIDABLE: Valid and enforceable on its face, but contains a weakness
allowing the injured, innocent party the choice of continuing the contract or
having it voided.

V. STATUTE OF FRAUDS
Certain valid contracts are adjudged unenforceable (no legal effect) if not in writing
and signed by their agent or the party to be obligated.
A. The primary purpose of the law
To prevent perjury, fraud and dishonest conduct when proving the existence of
certain important types of contracts.
B. Applying the Statute
The following must be in writing to be enforceable:
1. Any agreements used to sell, purchase or exchange real property.
2. Lease Agreements for a period over one (1) year.
3. Any agreement by its terms not to be performed within 1 year from the making
(execution) of the agreement.

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C. Statute of Frauds - Equal Dignities Rule

This law requires that when an agent represents a Principal, for their agency
contract to be enforceable, it must "Equally" meet the same standard the Statute
of Frauds required for the contract to be considered enforceable between their
Principal and the third party with whom the principal will be contracting.
MUST BE IN WRITING
Buyer/Seller Contract
Lessor/Lessee Contract (over 1 year)

EQUALLY
=
=

MUST BE IN WRITING
Agent's authority to represent Seller
Agent's authority to represent Lessor

MAY BE VERBAL
EQUALLY
Lessor/Lessee Contract (1 year or less)
=

MAY BE VERBAL
Agents authority to represent Lessor

VI. STATUTE OF LIMITATIONS

The running of the Statute of Limitations will bar (not allow) any action for relief for a
breach of contract.
A. One Year - Personal injury (Physical or Reputation).
B. Two Years - Agreements not required to be in writing.
C. Three Years - Trespass, encroachment or injury to real property (from date of
violation). Attachment Lien (may be extended an additional 2 years).
D. Four Years - Written Agreements.
E. Five Years - To recover real property from Adverse Possession, Prescription or
Property Tax Sale.
F. Ten Years - To take action on a decree of the court (judgment). Time begins
when entry of judgment is made by the court. 10 Year extension allowed.

VII. PERFORMANCE OF THE CONTRACT

A. Contracts are either:
1. Executed Contracts - Those which are fully performed, or
2. Executory Contracts - Those where something remains to be done.

VIII. TRANSFER OR REPLACEMENT OF CONTRACTUAL OBLIGATIONS

A. ASSIGNMENT - Transfer of all Rights, Obligations and Duties to Another
Unless an agreement specifies otherwise, it may be transferred in whole to another
party (assignee). Assignee becomes primarily responsible under terms of contract,
and Assignor remains secondarily responsible.
B. NOVATION - Replacement of an Existing Agreement With A New Agreement
Substitution of a new agreement with the intent of replacing the existing one. Can
be with the existing party or with new party.

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IX. DISCHARGE OF CONTRACTS

A. Full performance (most common)
B. Substantial performance (not complete, but little left to be done)
C. Part performance (can be remedied by liquidated damages)
D. Impossibility of performance (personal service-death of agent)
E. Agreement between the parties (may be mutually rescinded)
F. By release (an unilateral rescission)
G. By Operation of Law (can be remedied by liquidated damages)
H. By Acceptance of a breach of contract-no remedies sought
I.

By Breach of contract (Remedies may be sought-See X. below)

X. REMEDIES FOR BREACH OF CONTRACT

A. UNILATERAL RESCISSION
Innocent or injured party withdraws from agreement after other party has
breached.
Easiest action to take of the three remedies available.
e.g:-The innocent or injured party elects to withdraw from contract in which other party has
failed to perform.
e.g.- After breach injured party can release other party from contract obligation(s), or elect
to initiate action using B. or C. below.

B. ACTION FOR DOLLAR DAMAGES

Asking for damages caused by breach.
Except in rare instances, judgment will be for only "Actual Dollar Damages"
proven.
C. SPECIFIC PERFORMANCE
Asking for actual performance according to terms of contract
a. May be granted if dollar damages will not provide adequate remedy.
b. Generally considered most difficult of the three judgments to obtain.

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CONTRACTS
I. CONTRACT OF SALE
(Also known as Agreement of Sale, Land Contract, Conditional Sales Contract,
Installment Sales Contract, etc.)

A. PURPOSE: To finance real property.

B. AGREEMENT: To convey title only upon completion of contract terms.
C. THE PARTIES
1. VENDEE: Receives right to purchase. Holds equitable title.
a. Advantages
Excellent means of financing if Vendee has:
1) Poor credit, or
2) Minimal downpayment.
b. Disadvantages
1) No guarantee of receiving title to the property.
2) Death or mental incompetency of vendor could cause a lengthy delay in
securing the title.
3) Vendee may be prohibited from assigning interest.
c. Civil Code protections for the Vendee
1) If contract is unrecorded, without Vendee's consent, Vendor cannot
encumber subject property for an amount greater than the current loan
balance.
2) Money given vendor for payment of insurance and/or property taxes must
be placed into separate account and used only for that purpose, unless
instructed otherwise by vendee.
3) Money given vendor for payment on any obligation due on property shall be
used only for payment of that obligation.
4) Vendee may prepay at anytime. However, Vendor, by agreement in
writing may prohibit prepayment for up to 12 months (Allows vendor to
qualify for Installment sale).
2. VENDOR: Gives right to purchase. Holds legal title.
a. Advantages
1) No foreclosure required.
2) Delay of tax on a capital gain (if any).

74

b. Disadvantages
1) Title of property may be subjected to Mechanic's Liens.
2) Vendee may record contract and later abandon property causing a cloud
on the title. Possible impediment to future transfers.
a) Clauses prohibiting recording of the contract are considered
unenforceable.
b) Recorded contracts may be cleared from public record by;
(1) Quit Claim Deed, or
(2) Quiet Title Action (court action).

II. OPTIONS
A contract in which one party pays another (consideration) to hold an offer open for a
specific period of time.
A. PURPOSE: To hold an offer open (for leasing or purchasing).
B. METHOD: Contract and payment of consideration.
C. PARTIES: Optionor (owner) - Gives option/Receives consideration.
Optionee (buyer) - Receives option/Gives consideration.
D. TO BE ENFORCEABLE: Must be in writing.
E. TO BE VALID: Actual consideration must pass to Optionor.
F. SALE OF PROPERTY DURING OPTION PERIOD: Only to Optionee.
G. ASSIGNABILITY: Ok, unless consideration is a promissory note.
H. TYPES OF OPTIONS:
1. Agent with a listing coupled with an option to purchase.
a. If option to be exercised by agent:
1) Buyer must be advised agent is acting as a principal;
2) Agent must reveal anticipated profit to Optionor;
3) Agent must receive written approval from Optionor.

2. Real Property Option (agreement giving right to purchase property).

3. Lease Option (lease with option to re-lease at a future date).
4. Lease Option (lease with right to purchase property).
a. The lease contract is acceptable as a valid consideration for the option right.

I.

REMEDY IN THE EVENT OF BREACH: If a sufficient consideration has not been

given by the Optionee, a judgment for Specific Performance is not an available
remedy.

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III. LISTING AGREEMENT (Employment Contract)

A. PURPOSE
To Employ an agent to perform a service. Generally, an owner employs an agent
to find a buyer for their property.
B. TYPE OF AGREEMENT
Personal Service Contract. This type of agreement names specific parties. No
other parties may be substituted (unassignable).
C. TYPE OF RELATIONSHIP CREATED
Agency (fiduciary)
D. PARTIES
Principal -The one who appoints the agent.
Agent -The one who receives authority to represent the principal.
E. OBLIGATION OF AGENT TO PRINCIPAL
Fiduciary (A position of trust). May not use agency position to take unfair
advantage.
F. OBLIGATIONS OF AGENT TO THIRD PARTIES
Honesty and Fair dealings. Must disclose all known material facts.
G. TO BE VALID
Must have all essentials elements of a contract. Need not be in writing.
Consideration not required if a gratuitous agency.
H. TO BE ENFORCEABLE
Must be in writing (Statute of Frauds).
I. ASSIGNABILITY
Cannot be assigned by either party.
J. COMMISSION RATE
Set by agreement between principal and agent.
K. STATUTE OF LIMITATIONS
4 Years
L. COPIES OF SIGNED AGREEMENTS
Must be provided at the time of signature and retained for 3 years.
M. TYPES OF LISTING AGREEMENTS

1. Open Listing
a. Employment - Can employ more than one broker.
b. Commission Earned - First to present ready, willing & able buyer (if procuring
cause).
c. If Owner Sells - No commission earned by agents.
d. Notification of Sale - Owner not obligated to notify agents of sale.
e. Effect of Sale - Cancels all outstanding listings.
f.

Contract Term - No termination date required.

g. If No Termination Date - Owner may withdraw. If so, no commission earned.

h. Termination of Agreement - (See Termination on page 78)

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2. Exclusive Agency Listing

a. Employed - By one broker.
b. Commission Earned - Presenting ready, willing and able buyer during
listing term.
c. If Owner Sells - No commission (unless agent proves to be procuring
cause).
d. Contract Term - Must have a definite termination date.
e. Termination of Agreement - (See Termination on page 78)

3. Exclusive Authorization and Right to Sell

Allows cooperation between brokers and excludes owner's right to sell without paying a
commission during time of listing. a., b., d. and e. same as 2. above.

N. COMMISSION IS EARNED WHEN:

1. Agent presents offer from a "Ready", "Willing" and "Able" purchaser;
a. Under the exact terms, or
b. Any terms acceptable to the principal.
2. Principal (Owner) withdraws/cancels agreement (Provided agreement
contains a definite termination date).
3. Principal accepts offer. Later by mutual agreement, releases buyer from
agreement.
4. Property sold by owner after termination of the listing under substantially
similar terms, minus amount of commission that would have been paid to
broker.

O. COMMISSION IS NOT EARNED WHEN:

1. Buyer withdraws from contract (whether or not released by seller/principal.)
2. Owner sells to a party not procured by agent (Under Exclusive Agency).
3. Owner sells property prior to employed agent procuring a purchaser
(Open Listing).
4. Listing terminates, unless agent is the procuring cause, and owner sells
under substantially similar terms minus the amount of the commission that
would have been paid to broker.

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P. TERMINATION:
1. When Employing A Natural Broker
a. Term of agreement expires (If either an exclusive or open listing with a definite
termination date).

b. Reasonable period of time elapses (If an open listing with no definite

termination date).

c. Impossibility of performance (Death, Mental Incompetency or Destruction of

the Subject Property).

d. Owner withdraws (Has right to do so. May be liable for commission).

e. Broker withdraws (Has right to do so).
f. Mutual agreement to cancel (Mutual rescission).
2. When Employing A Corporate Broker (Legal Person)
Same as above except for c. Corporations cannot die or become mentally
incompetent.

Q. EFFECT OF BROKER'S DEATH: Natural vs Corporate Broker/Officer

1. Natural Person
a. Listings automatically terminate.
b. Licenses of parties representing broker no longer active through that broker; must
transfer license to another broker in order to continue active use of license.

2. Corporate Broker/Officer
Upon the death of the broker/officer all activities, for which a real estate
broker's license is required, would cease until such time as a new broker/officer
is appointed.
a. Listings remain binding agreements between principals and the corporate broker.
b. Licenses of parties representing the corporation remain under authority of the
corporation.

R. IMPORTANT CHARACTERISTICS OF EXCLUSIVE LISTING AGREEMENTS

1. Owner employs broker (Not broker's sales agents).
2. Revocation of Agreement:
a. Irrevocable by owner. Owner may be liable for commission if revokes.
b. Revocable by the broker. Proper notification required.
3. Description of the Property
Needs only to be adequate or sufficient to describe property. Not necessary
to be a legal description or street address
e.g. - "The pink house on the corner of 4th and Main Streets," is adequate if, the only
pink house on that corner.

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4. A Definite Termination Date Required

Contract is considered unenforceable if a definite termination date is not indicated.

5. Terms of Sale
To be entitled to their commission, broker must present an offer by a Ready, Willing
and Able purchaser under the stated terms, or any other terms that are acceptable to
the owner.

6. Acceptance of Deposit
The authority to accept deposit must be stated in listing; otherwise, broker accepts
deposit in favor of buyer.

a. Broker Liable to Buyer If:

1) Owner doesn't authorize acceptance.
2) Owner authorizes acceptance, but broker accepts an amount other than
amount authorized.
e.g. - Broker to accept no less than $1,000. Broker takes $500.

b. Broker and Owner Liable If:

1) Owner authorizes acceptance of deposit.
2) Owner doesn't authorize acceptance, however accepts offer showing deposit
was taken by broker.

7. Title Insurance, Structural Pest Control, Clearances and Appraisal Report

Paid for by whom ever has agreed to pay.
8. "For Sale Sign"
Cannot be placed on property without express permission of owner (Realtor's
Code of Ethics).
9. Compensation:
a. Broker entitled to Commission if:
1) Sold under the exact terms or any terms acceptable to owner.
2) Sold through any person other than employed broker (Exclusive Right to Sell).
3) Sold through any person other than employed broker or owner (Exclusive
agency).

4) Withdrawn from sale during listing term.

5) Transferred to another party.
6) Conveyed to another party.
7) Leased without consent of the broker.
8) Made unmarketable by any voluntary act of the owner.

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b. Broker Commission is based on:

1) Selling Price: At sale of property.
2) Listing price: If property does not sell (owner's interference).

c. Broker is Paid:
1) A Percentage of the selling price (e.g. - 6% of selling price).
2) A Flat Rate (e.g. - $2,000).
3) An amount over an above a "Net Sum" guaranteed the seller by the broker.
(e.g. - The owner wishes to receive a net of $30,000 from proceeds of the sale.
Any amount over $30,000 received, broker may be entitled to as commission.)
4) May be in any form of payment agreed upon (e.g. - A car, a promissory
note, cruise line tickets, etc.).

10. Safety Clause

States if owner sells formerly listed property to a party which broker can prove
to be the procuring cause, broker is entitled to commission. This clause
generally requires:
a. A written list of prospects be provided seller within a designated time
period. (e.g. - 10 days before expiration of listing) and,
b. The maximum period for which this clause is effective (e.g. - 180 days).
11. If Legal Action Required to Collect Compensation
Says that owner shall pay agent's attorney fees.
12. Co-operation With Other Agents
Owner authorizes agent to cooperate with other agents (Exclusive Right to
Sell).
13. Owner's Failure to Disclose
Agent will be held harmless for damages sustained as a result of
misinformation provided by owner. An agent however, has obligation to make
a diligent visual inspection of the property. Can be held liable for any
undisclosed defects they are aware of, or as a professional, of which they
should have been aware.
14. Agreement Signed By Owner(s)
Any competent adult signing a listing agreement is obligated under the terms to
pay if the described service has been performed.
a. A sole owner, tenant in common, or joint tenant may list their individual interest. In
the event of breach only their interest would be subject to any legal remedy.
b. All tenants in common, or all joint tenants can list the full ownership. If so, in the
event of breach, the individuals and their interests could be subjected to any legal
remedies.
c. If either spouse lists community property, in the event of breach, agent would likely
file an action against the party who signed agreement; however, community
holdings of both could be subject to any legal remedies.
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15. Due Diligence Clause

The Agent agrees to use diligence in endeavoring to procure a purchaser.
This clause makes agreement Bilateral.
16. Signed by the Broker
Agreement is signed by broker or signed on broker's behalf by one of broker's
representatives. (e.g. - Accepted for the broker by the broker's salesperson.)
IV. PURCHASE CONTRACT AND RECEIPT FOR DEPOSIT
Commonly known as the "Deposit Receipt"
A. PURPOSE: To ultimately create a contract to purchase real property.
creates an offer, a deposit receipt, a contract and commission agreement.

It

B. PARTIES
Offeror(s) - Party/parties making the offer
Offeree(s) - Party/parties receiving the offer
C. OBLIGATIONS OF PARTIES: To fulfill terms of contractual obligations.
D. OBLIGATION OF AGENT
1. Fiduciary - Must disclose everything that is pertinent to their principal(s). Must
not disclose any information that would be considered discriminatory.
2. Honesty and Fair Dealing - Must disclose to third parties all known materials
facts regarding the purchase of property. In so doing, cannot violate the
fiduciary obligations to their principal.
a. If representing the seller; Fiduciary to seller, Honesty and Fair Dealing with
buyer.
b. If representing the buyer; Fiduciary to buyer, Honesty and fair Dealing with
seller.
c. If representing both parties (dual agency) a full disclosure required.
Fiduciary to both seller and buyer.
E. TO BE VALID: Must have all essential elements of a contract.
F. TO BE ENFORCEABLE: Must be in writing (Statute of Frauds).
G. ASSIGNABILITY: May be assigned if mutually agreed upon.
H. STATUTE OF LIMITATIONS: 4 Years
I.

COPIES OF SIGNED AGREEMENTS

Must be provided to all parties at time of signature. Retained 3 years by broker.

81

J. ALL OFFERS MUST BE SUBMITTED TO PRINCIPAL

Exceptions are; Offers considered frivolous, or receiving authorization from owner to
reject certain.
K. CONFLICTING TERMS
In the absence of evidence;
a. Typed portions supersede conflicting preprinted portions;
b. Handwritten supersedes all conflicting portions.
L. CONTINGENCIES (Subject to)
If a contract is written containing a contingency, the contingency must be met
within the time specified or the contract is void. e.g. - "Subject to qualifying for
financing" or "Subject to the sale of a designated property"
M. IF BUYER BREACHES, SELLER'S REMEDIES CAN BE:
1. If "Liquidated Damages Clause:"
Seller can retain amount agreed upon, usually buyer's deposit.
2. If no "Liquidated Damages Clause:"
a. Unilateral Rescission (release the buyer).
b. Suit for Actual (compensatory) Damages;
c. Suit for Specific Performance;
N. IF SELLER BREACHES, BUYER'S REMEDIES
1. Unilateral Rescission (release the seller).
2. Suit for Actual (compensatory) Damages;
3. Suit for Specific Performance;
O. TERMINATION OF AGREEMENT
1. Full performance by both parties.
2. Forfeiture of liquidated damages.
3. Mutual agreement of the parties.
P. EFFECT OF DEATH OF EITHER BUYER OR SELLER
Once agreement is communicated and is binding and enforceable, death will not
terminate agreement. Surviving party may petition the estate of deceased asking that
contract terms be completed. If unsuccessful, may take legal action against estate's
Executor or Administrator.

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Q. TERMS AND CONDITIONS FOUND IN PURCHASE AGREEMENT

1. Date and Place Contract Executed
2. Description of Property
Should adequately describe property. Does not have to be street address or
legal description.
3. Deposit (Earnest) Money
In the agreement, if not indicated otherwise, the principal is to believe agent is
holding cash or the equivalent of cash. e.g. - If something other than cash; a
promissory note or check, it should be indicated in writing.
4. Handling Deposit Money
a. Carrying out Specific Instructions
e.g. - Instructions by buyer to hold check uncashed; to place check in trust account or
escrow. Broker must honor requests and advise seller in writing (in offer) of buyer's
instructions.

b. If given a personal check

Put in for collection no later than next business day.
c. Reimbursement for check deposited in trust account
Regulations require that broker not issue a check to reimburse for one
placed into account until client's check has cleared their bank.
d. Offer with deposit-Offer not yet accepted
1) Agent given no authority to take. Holds buyer's deposit as agent of buyer.
2) Agent given authority to take. Holds buyer's deposit as agent of seller.

e. Offer with deposit-Seller accepts offer

Agent holds buyer's deposit money as agent of seller.
5. Delivering Title to Buyer
Seller agrees to deliver clear title subject to any exceptions mutually agreed
upon. e.g. - Buyer assumes existing notes, liens, any easements on property,
CC&Rs, etc.

a. A decision as to who pays title insurance.

b. Seller indicates known factors that affect title.
c. If title can't be delivered as agreed, indicates contract may be terminated by
buyer.
6. Proration During Escrow
Indicates which items to be prorated and chosen date of proration.
specific date is indicated, prorated as of date of Close of Escrow (COE).
7. Bond Assessments
Indicates if any, amounts due, and who pays.
8. Documentary Transfer Tax
Who pays? Negotiable, generally paid by seller.

83

If no

9. Date of Possession
Date buyer to take possession. If seller remains on premises after close of
escrow, how long seller will remain, and if rent is to be paid to new owner.
10. Delivery of Escrow Instructions
Within how many days after acceptance, must escrow instructions be signed
by parties to the agreement.
11. Close of Escrow
Date by which escrow must close, unless extended by mutual agreement. As
broker is neither buyer nor seller, cannot extend escrow period, nor change any
terms of agreement.
12. How Title is to be Vested
If filled-in, indicates method of title chosen by buyer(s). If not completed, not
determined during escrow, and if deed indicates "Husband and Wife", method
of title is presumed to be Community Property.
13. Buyer's and Seller's Risk Clause
What is effect on the sale if a material change occurs prior to close of escrow?
e.g. - A Structure burns down, there is no fire insurance. Indicates buyer(s) at their
option, may terminate agreement and any deposit money shall be returned to them.

14. Liquidated Damages Clause

If buyer should fail to complete purchase, an agreed upon amount of damages
will be awarded the seller (usually buyer's deposit).
3% LIQUIDATED DAMAGES CLAUSE
a. Applies only to 1 TO 4 UNIT OWNER-OCCUPIED PROPERTIES.
b. Must agree on Liquidated Damages as the remedy.
c. Seller may retain only 3% of purchase price in the event buyer defaults.
d. If deposit is greater than 3%, seller may retain up to 3%, but may recover
additional sums up to any agreed upon amount, if can prove actual loss.
15. Acceptance Period
Indicates time within which seller has to accept offer. If not accepted and
communicated as agreed upon within time period, agreement would be void unless
mutually accepted later.
16. Communicating Acceptance of Offer
Acceptance is required to create a binding purchase agreement. Method of
communication of acceptance should be expressly indicated. If not, it would be
the usual and reasonable method for that circumstance.
17. Withdrawing Offer
An offer may be withdrawn by the offeror any time prior to proper communication of
acceptance.
84

18. Time is of the Essence

This term is expressly printed into the agreement. Simply means, "To act as
quickly as is prudent within the time allotted."
19. Purchaser(s) Sign
a. Usually all parties purchasing sign. It is possible for one person to
purchase, yet have the deed drawn showing other parties as owners. This
may be a breach of an agreement with the lender, therefore not commonly
done.
b. If community property, either spouse may sign. In the event of breach, the
signor may be sued, and funds of the community property of both may be
held liable for satisfying the judgment.
20. Commission
a. Commission Rate
Established by mutual agreement between principal and agent.
1) Usually established in listing agreement; can also may be established in
purchase contract.
2) If no previous listing agreement, then it should be indicated in the
purchase contract.
3) If no listing agreement and not mentioned in purchase contract, principal
would not be obligated to pay a commission, even if a verbal agreement
existed. (Statute of Frauds).
b. When Commission has been Earned
1) Deed is recorded, or other evidence that title has transferred.
2) The seller breaches.
3) The seller releases the buyer by mutual agreement. (true only if agent has
listing agreement)

4) Buyer breaches and contract specifies that:

"In the event of the buyer breaching the agent would be entitled to half
the damages collected after first deducting any expenses of collecting
damages, title and escrow fees or any other expenses of collection".
c. Commission not Earned
Buyer does not purchase as agreed. No clause is included specifying that
agent would be entitled to part should seller collect anything from buyer.

85

c. Commission Splits Between Agents

1) Broker to Broker
a) Verbal agreements between brokers to split
enforceable in a court of law.
b) Cannot pay money to another broker's salesperson.

fees

are

fully

2) Brokers and their Employed Salespersons

Brokers required by Commissioner's Regulations to have adequate
agreements specifying agents rights, obligations and duties while
working under their license.
a) Both parties sign and each must keep copies for a minimum of 3
years from the date the agreement terminates.
b) Each to receive a copy at time of signature.

21. Acceptance by Seller(s)

a. If a sole-owner, or an interest as opposed to full ownership (e.g. - A joint
tenant, a tenant in common or a partner in a partnership), only that party
whose interest is being sold must sign.
b. If conveyance of full title must be signed by the sole-owner, all joint tenants,
all tenants in common, or all partners in partnership.
c. Community Property holdings. Both partners should sign agreement to sell.
If one spouse only, the other may file charges of fraud within one year. If
fraud is proven, sale may be set aside. As a matter of business practice,
both signatures are normally requested.

V. DISCLOSURE STATEMENTS
A. Special Studies Zone Disclosure
In this statement the paragraph indicates that "Buyer has_________________
days to make further (amount of calendar days) inquiries at appropriate
government agencies. If findings unsatisfactory, at buyer's option, buyer may
terminate agreement, if done in writing within time indicated in the blank space.
Failure to notify owner is considered conclusive approval by the buyer."

86

B. Real Estate Transfer Disclosure Statement

To be provided by transferor of 1 to 4 Unit Residential Properties
Law became effective January 1, 1987

1. Legal decision that prompted Disclosure Statement - Easton vs.

Strassburger
2. Reason disclosure was required
Giving information considered material to buyer's decision to purchase
property.
3. When Broker should obtain Statement - At the time of listing property.
4. When Broker should deliver copy of Statement
To prospective buyer prior to any formal offer to purchase.
a. If copy of statement is delivered after obtaining an offer, prospective buyer
may cancel offer within;
1) 3 DAYS after disclosure is hand delivered;
2) 5 DAYS after disclosure mailed.

5. Visual inspection required

Buyers, sellers, and brokers are required to make a careful visual inspection
and disclose any problems uncovered as a result.
a. Does not apply to common areas of property.
b. 2-Year Statute of Limitations.
6. When Broker not liable
a. When adverse conditions are not obvious to broker.
b. When adverse conditions are known in advance by buyer.
7. Defects Discovered after Buyer Takes Title
Responsibility of buyer to remedy if defects not known to seller or broker.
C.

Agency Disclosure Statement

Law became effective January 1, 1988

1. Purpose
This is a written disclosure and declaration by the listing and selling broker(s)
as to whom they represent in the transaction.
2. Disclosure Covers - 1 to 4 unit residential properties
3. Characteristics of Disclosure Law
a. Must be done prior to close of escrow if representing;
1) Seller only
2) Buyer only
3) Both Seller and Buyer (dual agency).
b. Must be signed by buyer, seller, and broker acknowledging their
understanding of the relationships.

87

88

Chapter 5
_______________

APPRAISAL
I. DEFINITION OF APPRAISAL
An estimate or opinion as to the value of an item made as of a specific date by a
person considered competent to perform the appraisal. (Note: Date of value to
appraiser: "Date of the site inspection." Important date of value as between the
buyer and seller: The date they've both signed the purchase contract
agreement.)

II. TWO MAIN DEFINITIONS OF VALUE

A. UTILITY VALUE (Value in Use) - Known as "Subjective Value".
Includes valuation of amenities, which attach to a property, or determination of
value of property for a specified purpose for a specific person.
B. MARKET VALUE (Value in Exchange) - Known as "Objective Value".
Identifies value in money or other forms of exchange for which a property may be
"Sold" or "Exchanged" under prevailing market conditions.
Example: Mrs. Johnson purchased a Victorian home and due to it's unique design
appealing to her, was willing to pay more than others were willing to offer (Subjective
Value). Upon offering it for resale she received only what others were willing to pay for an
older home (Objective Value).

III. FOUR ELEMENTS THAT INFLUENCE VALUE

(Value and Worth have the same meaning)

A. UTILITY (Most Important)

To have value, an item must have a use. The use to which an item is put which
produces the "Greatest Net Return" is known as its Highest and Best Use.
B. SCARCITY
A shortage of available supply compared to demand for item.
C. DEMAND
The desire to possess. In order to be effective it must be backed by Purchasing
Power.
D. TRANSFERABILITY (Critical to value, but least important of the four))
The condition and capability of the title to be conveyed.
Note:

Cost (price) is not an element of value. Cost represents what was paid for an item.
Example: Buyer paid $3000 (Cost) in 1931 and resold for $120,000 (Value) in 1993.

89

IV. DIFFERENT TYPES OF VALUE

A. APPRAISED VALUE
A competent appraiser's estimated value of a property.
B. ASSESSED VALUE
Used in property taxation (real & personal).
1. Established at 100% of the Fair Market Value at time of acquisition.
e.g. - Fair Market Value $50,000 - Assessed Value $50,000

2. Tax Rate established at 1% of Assessed Value.

3. May be increased 2% per year maximum thereafter.
4. New improvements assessed upon completion of improvement. Supplemental
Property Tax Bill sent.
C. BOOK VALUE (Also known as "Cost Basis")
Used for tax purposes to determine profit or loss in sale of property.
a. Process:
1) Establish Original Book Value (Acquisition Cost).
2) Adjust Book Value (Cost Basis) upward for improvements made.
3) Adjust Book Value (Cost Basis) downward for depreciation taken or allowed.
4) Deduct Adjusted Cost Basis from Adjusted (Net) Selling Price to determine the
Realized "Gain or Loss".
Real Estate Commission
Not used to adjust basis
If paid by BUYER: Considered part of acquisition cost.
If paid by SELLER: Considered an expense of selling.
Example of Adjusting the Basis
Purchase price
$30,000 (Original Book Value)
Room Addition
+5,000 (Adjusted upward)
$35,000 (Adjusted Book Value)
Depreciation
-1,000 (Adjusted downward)
$34,000 (Adjusted and current Book Value)
If property sold netting $40,000 after all expenses, profit would be ($40,000 - $34,000)
$6,000.

D. LOAN VALUE
Value placed on a property by lender for purpose of making a loan. This value is
established by an appraisal. Based on appraised value lender will make a loan of
a certain percentage of that appraised value.
e.g. - If a 90% loan-to-value ratio...If loan value is established by appraisal at $60,000, the
loan would be for ($60,000 x 90%) $54,000.

E. MARKET VALUE
What property sells for with a "Willing Buyer" and a "Willing Seller", both
knowledgeable of the market, given a reasonable period of time to make their
decision, and with neither party under any adverse pressure to buy or sell.

90

V. FOUR FORCES INFLUENCING VALUE

Seldom asked about on the license examinations

A. ENVIRONMENTAL/PHYSICAL CHARACTERISTICS - e.g. - Close proximity to

conveniences
such
as
schools,
transportation,
Environmental...Climate, soil, topography, etc.

parks,

churches,

shopping.

B. SOCIAL IDEALS/STANDARDS - e.g. - Population, birth, marriage, death, divorce, etc.

C. ECONOMIC - e.g., Availability of money, interest rates, wage levels, Business Cycles (RecessionShort downturn, Depression-Prolonged
upturn.), rental and price patterns.

downturn,

Expansion-Upturn

and

Prosperity-Prolonged

D. POLITICAL/GOVERNMENT REGULATIONS - e.g. - Control of credit, zoning, building codes,

rent controls, monetary policies, etc.

VI. FACTORS INFLUENCING VALUE

A. Amenities
Attractive or desirable features within or outside property; e.g. - Landscaping, a view, or close
proximity to conveniences. Primarily affects values of residential property.

B. Building Restrictions/Zoning
Establishes the use of real property by private restrictions or government control.
Property limited to a specific use e.g. - "For R-l Single Family Dwelling Only"

C. Corner Influence (Conspicuousness)

The value of a commercial property located at an intersection/corner tends to increase the
value of the business and thus, the value of the land.

D. Directional Growth
The trend or direction which an area grows tends to increase/decrease the land value.

E. Exposure to the Sun (relating to commercial property)

The sides of the street preferred by retail merchants: South and West (receive afternoon shade).
Commercial Intersection; Most preferred corner: Southwest. Least preferred corner: Northeast

F. Location
1. One of the most important factors influencing value.
2. In a "Residential Subdivision", the most preferred lots are those located in the "center
of the subdivision" and additionally located on cul-de-sacs (dead-end streets).
3. A 100% Location: The most highly traveled location(s) in a commercial area.

G. Obsolescence
Factors outside of property and/or physical aspects within property causing loss of value.

H. Plottage
The Increase in value that results from the combining of two or more parcels of land into
one larger parcel. The term "Assemblage" identifies the process of combining the smaller
parcels into the one larger parcel.

I.

Shape and/or Size of Lot

May prove a benefit or disadvantage to value. It is found that in residential locations, wider
lots are preferred.

J. Topography and Soil

The contour of the land and soil conditions effect value. Rolling land is desirable for
residential use. Fertility of the soil is important for Agricultural land.

91

VII. PRINCIPLES OF VALUATION

A. Principle of Conformity
Holds that maximum value is realized when land uses are compatible and a reasonable
degree of architectural harmony exists. Zoning ordinances help conformity standards.
Conformity is most often created through the use of private restrictions.

B. Principle of Change
Real property is in a constant state of flux and change, affecting individual properties,
neighborhoods and cities. Appraisers follow trends/influences and are sensitive to
changes in conditions that affect the value of real estate.

C. Principle Of Substitution
The Basis of the Appraisal Process. Value will tend to be set by the cost of an equally
desirable substitute. In a free market, the buyer can be expected to pay no more, and a
seller can expect to receive no less, than the price of an equivalent substitute.

D. Principle of Supply and Demand

Increasing supply or decreasing demand tends to reduce price in the market. Decreasing
supply or increasing demand tends to increase price in the market.

E. Principle of Highest and Best Use

The best use of land, known as it's highest, best, and most profitable use, is that which is
most likely to produce the Greatest Net Return to the land over a given period of time.

F. Principle of Progression
The worth of a lesser-valued object tends to be enhanced by association with many
similar objects of greater value (Under-improvement).

G. Principle of Regression
The worth of a greater valued object tends to be reduced by association with lesservalued objects of the same type (Over-improvement).

H. Principle of Contribution
A component part of a property is valued in proportion to its contribution to the value of the
whole property, or by how much that part's absence detracts from the value of the whole.
Maximum value is achieved when improvements on-site produce the highest (net) return
commensurate with the investment. Should consider prior to adding improvements.

I.

Principle of Anticipation
Value is created by anticipated future benefits to be derived from the property. In the Fair
Market Value Analysis, appraisers estimate the present worth of future benefits. This is the
Basis for the Income Approach to value.

J. Principle of Competition
Competition is created where substantial profits are being made. Excess competition
creates over-supply in relation to the current demand.

K. Principle of Balance
Value is created and sustained when contrasting, opposing, or interacting elements are in
equilibrium, or balance. Proper mix of varying land uses creates value. Imbalance - Over or
under-improvement of the site.

L. Principle of Three Stage Life Cycle

As all material things will eventually waste-away, Property is characterized by 3 Stages:
Development (Growth)--Maturity (Stability)--Old Age (Decline).

92

VIII. DEPRECIATION
Two Forms
Appraisal Purposes - Actual Depreciation (accruing and accrued)
Income Tax Purposes - Book Depreciation (accrual)

A. FOR APPRAISAL PURPOSES

Described as Actual Depreciation - Defined as "The Loss of Value Due to Any Cause"

1. THREE MAJOR CAUSES OF DEPRECIATION

a. Physical Deterioration
Examples: Wear and tear from use
Negligent care (deferred maintenance-accrued)
Dry rot
Severe changes in temperature
Termites

1) Inherent: Found within the property.

2) Curable or Incurable: Dependent upon cost, not the possibility of curing.

b. Functional Obsolescence
Examples: Poor architectural design
Lack of modern facilities
Out-of-date equipment
Obsolete construction methods and materials
Changes in construction style
Changes in utility and/or demand

1) Inherent: Found within the property.

2) Curable or Incurable: Dependent upon cost, not the possibility of curing.

c. Economic/Social Obsolescence
(External Obsolescence)
Examples: Misplaced improvements
Zoning
Change of locational demand (population moves)
Change of government restrictions
Airplane landing patterns crossing property

1) Extraneous (found outside property)

2) Incurable in most cases.

93

B. DEPRECIATION FOR INCOME TAX PURPOSES - Book Depreciation

Purpose: Used for accounting purposes to create an income tax benefit.
Depreciable Property: Income, Trade or Business Properties.
Not Depreciable Property: Owner-Occupied Residence.
1. Fundamental Steps in Calculating Depreciation
To depreciate property, there must be "Improvements" (land not depreciable).
Step 1 - Allocation
Because land cannot be depreciated for tax purposes, it is necessary to determine
Improvement value. This process is known as "Allocation".
Allocation Process

(Using the Property Tax Bill)

Land
Improvements
Total

$ 17,500
$ 82,500
$ 100,000

Determining the percentage of the overall value attributed to the improvements.

Improvement value
$ 82,500
Compared to total value $100,000

Equals 82.5%

Finding the value of the improvements using the above figures.

(Owner's original (Historical) Cost is used.)

Purchase price of property: $120,000

Percent of value attributed to improvements: 82.5%
Calculating improvement value for depreciation...
$120,000 (Cost) x 82.5% (Portion attributed to improvements) = $99,000
Step 2 - Determining Remaining Useful Economic Life of the improvements
Depreciation Schedule set by Law (Current Schedule)
Residential Income Property - 27-1/2 years
All other depreciable property - 39 years
Step 3 - Determining the yearly depreciation
Current method available: Straightline (Equal amounts written-off each year
over the life of the improvement)
If property is a "Residential Income Property"...
$ 99,000 (improvement) divided by 27 1/2 YEARS = $3,600 PER YEAR

This $3,600 would represent a "Paper Loss" for the owner which is commonly
identified as "Return Of" the investment (the Recapture of depreciation loss
attributed to the improvements)...Also referred to as the "Tax Shelter of Real
Estate".
Note: Other methods previously used: Declining Balance..125%, 150%, 175%, 200% Methods and
Sum-of-the-Years-Digits (Available prior to 1986). If a property were owned prior to 1986, the owner
could have selected any of the above "Accelerated Methods".

94

X. THREE BASIC WAYS TO APPRAISE REAL PROPERTY

Comparison of Market Data - Comparative Analysis
Cost Approach - Reproduction or Replacement
Income Approach - Capitalization of Net Income
A. COMPARISON OF MARKET DATA
Based on the Principle of Substitution

1. Oldest and easiest method to use.

2. Compares similar properties making positive or negative adjustments for any
differences.
e.g. - Areas of adjustment: Date of sale, location, terms of sale, etc.

3. Most common method utilized by Brokers and Salespersons.

4. Used to Evaluate:
a. RAW / UNIMPROVED LAND - The most commonly used method.
b. SINGLE FAMILY DWELLINGS - Comparison of market data usually most reliable for
older properties. Cost Approach more reliable on newer properties.

Example of Comparison of Market Data Approach

1417 SHADYGROVE LANE - Property to be evaluated "Subject Property".
411 ELM STREET - Comparable property
Sales price:

$200,000

Date of sale:

October 1, 2000

Date of Appraisal:

October 15, 2000

_____________________________________________________________________________________________

Subject Property
One less bedroom
Better landscaping
A panoramic view
Extra half-bath
Time of sale
Overall adjustment

Adjustments made to Comparable

-$5,000
+$2,000
+$1,500
+$2,500
-0+$1,000

Based on the above, the subject property is worth $1,000 more than the one to which it
is being compared.

APPRAISED VALUE OF 1417 SHADYGROVE LANE IS:........$201,000

95

B. COST APPROACH (Replacement or Reproduction)

____________________________________________________________________________________________________________________________________________

This method reconstructs the improvements new at today's costs, then deducts
depreciation based on the Actual or Effective Age of the improvements. As a final
step, adds this depreciated improvement value to the current value of the land.
1. TYPES OF COSTS
a. Reproduction Cost New
The cost of Reconstructing an actual "Replica" (exact duplicate) of the
building to be evaluated. This method is seldom used.
b. Replacement Cost New
Cost to reconstruct an "Equally Desirable Substitute" using modern
methods, designs and materials. Method most often used.
2. AGE OF IMPROVEMENT (Chronological or Effective)
a. Actual Age
The Actual or Chronological age of improvements. This information is
usually found quite readily at the County Tax Assessor's Office.
b. Effective Age
This is the age established by an appraiser, which may be shorter or longer
than the actual age, and is based on the current condition of the property.
3. LIFE OF IMPROVEMENT
a. Economic Life
The period of time that an improvement will provide a productive income in
relation to it's improvement value. Economic life is never longer than a
property's physical life.
b. Physical Life
The period of time to which the property can be used for any purpose.
Destruction of the improvement would end it's physical life. The greatest
loss in value of an improvement is loss of it's physical life.
4. USED TO EVALUATE
a. Service Type Properties - Churches, schools, libraries, public buildings,
etc. Because of uniqueness of these properties, this is the most reliable
approach.
b. Single Family Dwellings - Usually effective on newer dwelling as little
depreciation has yet occurred.. Due to the fact it is very difficult to
determine accurately the amount of depreciation on older properties, unless
they are unique, they can be more effectively evaluated using the
Comparison of Market Data Approach.

96

5. STEPS IN PERFORMING THE COST APPROACH

Step 1 - Determine current value of the land. This process is most often
accomplished by using the Comparison of Market Data Approach on similar
lots that have recently sold.
Step 2 - Determine cost of replacing the improvement at today's current
prices. One of four methods can be used;
a) QUANTITY SURVEY
A detailed cost estimate of labor and materials, broken-down to each
individual item. e.g. - Lumber, nails, wiring, laborer's wages, etc. This
method is the most accurate, but also the most expensive to calculate.

b) UNIT-IN-PLACE
Assembled components cost. Bedrooms, Bathrooms, Kitchens, etc.
Takes unit cost into consideration. e.g. - $4.00 square foot for foundation,
$1.65 square foot for block walls, etc.

c) CUBIC FOOT
Breaks cost down to a charge per cubic foot of construction area.
e.g. - Room that is 20 feet wide x 40 feet deep x 10 feet high, contains
(20x40=800x10) 8000 cubic feet. Price per cubic foot $8.00.

COST TO REPLACE...8000 X $8.00 = $64,000.

d) SQUARE FOOT
Breaks cost down to a charge per square foot of construction area.
e.g. - Room that is 20 feet wide x 40 feet deep contains 800 square feet.
Price per square foot $80.

COST TO REPLACE...800 x $80.00 = $64,000.

Step 3 - Determine depreciated value of improvement using Straightline
Method. Deduct depreciation from cost new, leaving current or depreciated
value of improvements.

Step 4- Add current land value to depreciated value of improvements.

The total will indicate appraised value of the whole property.
6. APPRAISING - Using Cost Approach
Facts:

Improvements (Outside measurements)

Cost per square foot to replace
Current value of land
Life span of improvements
Current age of improvements

40 feet x 50 feet
$ 80.00
$ 50,000.00
40 Years
10 Years

See next page for step-by-step process to evaluate property using the above figures.

Cost Approach (Continued)

97

Calculating value of property based on previous page's fact's

Step 1- Current value of land - $50,000

Step 2- 40 feet by 50 feet = 2000 Square Feet
2000 square feet x $80 square foot = $160,000 (Cost new)
Step 3- $160,000 divided by 40 year life = $ 4,000 per year depreciation
$ 4,000 x 10 years (Actual Age) = $40,000 Accrued Depreciation
Deduct $40,000 (Accrued Depreciation) from $160,000 (Cost new)
Leaving the depreciated value of improvements: $120,000
Step 4- Current Value of Land...................$ 50,000
Current value of Improvements....$120,000

APPRAISED VALUE of total PROPERTY

$170,000

Using an Effective Age

______________________________________________________________________________________________

If a property is in better condition than its actual age (e.g. - remodeled, superior
maintenance, etc.), this would indicate appraiser should apply an Effective Age.
The Effective Age is used to make a value adjustment to the property. If an
effective age is given, it is to be used instead of the actual age.
e.g. - Actual Age of property
Effective age given by appraiser

10 Years
5 Years

Making an adjustment to Step 3 above

___________________________________________________________________________________________________

1) Multiply the $4,000 x 5 Years = $20,000

2) Deduct this amount from the $160,000 ($160,000 - $20,000)
3) This leaves depreciated improvement value of $140,000
4) Current Value of Land...................$ 50,000
Current Value of Improvements...$140,000

APPRAISED VALUE of total PROPERTY

$190,000

98

C. INCOME APPROACH
Based on the Principle of Anticipation
The Value is based on the "Present worth of future benefits of property being purchased".

1. USED TO EVALUATE
a. Commercial Properties
b. Industrial Properties
c. Residential Properties
2. STEPS OF INCOME APPROACH
Step 1 - Gross Scheduled Income calculated.
(Economic Rent - What a property would for in current market)
(Contract Rent - What a property is renting for based on contract)
The Income Approach considers "Economic Rent"

Step 2 - Adjusted (Effective) Gross Income calculated.

Determined by deducting projected loss of income due to:
(1) Loss of rental income from vacancies
(2) Losses from non-payment of rent
Step 3 - Allowable Expenses determined and deducted.
(1) Fixed Expenses
e.g. - Property taxes and Insurance premiums

(2) Operating Expenses

e.g. - Maintenance fees, Management costs, i.e., Professional and/or
Resident Manager, Utilities, etc.

(3) Reserves for Replacement

e.g. - Carpets, Drapes, Appliances, etc.
Not considered an allowable expense - Loan Payments
Because loan payments vary due to the amount of downpayment, loan
term, and interest rates, the loan payments (Principal and/or Interest) arent
considered, in the appraisal process, as an expense that is deductible for
the purpose of computing the "Net Income" of the property.

Step 4 - Net Income calculated

Subtract the Allowable Expenses from the Effective (adjusted) Gross
Income.
Step 5 - Capitalization Rate determined (Cap-Rate)
This is figured by determining:
(1) Return On Investment - The rate of return with which investors would
be satisfied if owning this property, and;
(2) Return Of Investment - The amount to be recaptured from the
depreciation on the improvements.

99

Step 6 -

Determine the Value of the Property

Can be done applying one of 3 techniques:
(1) Property Residual (Land & Building values unknown)
Divide the "Net Income" derived from both the land and
improvements by a "Cap Rate" to arrive at the appraised value.
(2) Land Residual (Building value known, land value unknown)
See following pages for example of doing Land Residual
Technique.
(3) Building Residual (Land value known, building value unknown)
See following pages for example of doing Building Residual
Technique.

RESIDUAL TECHNIQUES
Examples of Property, Land and Building Residual Techniques

Property Residual
Unknown factor: Combined Value of Land and Improvements
FACTS (yearly figures)
Gross Income
Vacancies and Rent Collection Loss
Total Allowable Expenses
Capitalization Rate

$60,000
5%
$41,000
12.9%

PERFORMING THE "PROPERTY RESIDUAL" TECHNIQUE

Gross Income
$60,000
Minus Vacancies/Rent Collection Loss
($60,000 x 5% = $3,000)
-3,000
Effective/Adjusted Gross Income
$57,000
Minus Allowable Expenses
- 41,000
NET INCOME
$16,000
Total Appraised Value: $16,000 (Net Income) divided by 12.9% (Cap Rate) =$124,031
____________________________________________________________

Land Residual
Unknown factor: Land Value
FACTS (yearly figures)
Net Income produced by land and improvements

$16,000

Improvement Value (known factor)

$90,000

Remaining economic life of improvements

25 years

Current market interest rate (expected RETURN ON capital invested)

100

10%

Land Residual Technique (continued)

PERFORMING THE "LAND RESIDUAL" TECHNIQUE

100% Investment in improvements divided by 25 years =
(Return Of...Return to offset improvement value loss)
Normal required return on money invested
Return required from improvements:
Return required from the land

4%
10%

14%
10%

Step 1 - Determining the net income attributed to the improvements

$90,000 (improvement value) x 14% = $12,600
Step 2 - Determining the net income attributed to the land
$16,000 (total income) - $12,600 (Improvement income) = $3,400
Step 3 - DETERMINING LAND VALUE
$3,400 (land income) divided by 10% = $34,000 (Missing Factor Found)

Step 4 - TOTAL APPRAISED VALUE OF LAND & IMPROVEMENTS - $124,000

$90,000 (Improvements) + $34,000 (Land)

Building Residual
Unknown factor: Building (Improvement) Value
FACTS (yearly figures)
Net Income produced by total property
Land Value
Remaining economic life of improvements
Current market interest rate

$16,000
$34,000
25 years
10%

PERFORMING THE "BUILDING RESIDUAL"

100% Investment in improvements divided by 25 years =
Add return equal to current interest
RETURN REQUIRED FROM IMPROVEMENTS

4%
+10%
14%

Step 1 - Determining income attributed to the land

$ 34,000 x 10% = $ 3,400
Step 2 - Determining income attributed to the buildings
$16,000 minus $3,400 = $ 12,600
Step 3 - DETERMINING BUILDING VALUE
$12,600 divided by 14% = $90,000 (Missing Factor Found)
Step 4 - TOTAL APPRAISED VALUE OF LAND AND IMPROVEMENTS - $124,000
$34,000 (land) + $90,000 (Improvements)

101

XI. INCOME PROPERTY - ADDITIONAL INFORMATION

A. METHODS OF DETERMINING A CAPITALIZATION RATE
1. Band of Investment Theory
2. Summation
3. Comparison
B. USING GROSS MULTIPLIERS
Gross Multipliers use "Gross Income" figure (before expenses are deducted), not
net income.
1. MONTHLY - Finding a Monthly Multiplier
Usually applied to smaller income producing properties
Example of determining the Multiplier
Property renting for $1,000 sells for $100,000 ($100,000 divided by $1,000 = 100)
Multiplier of 100 is indicated
Example of applying the Multiplier
A property currently renting in this same area for $1,150 would then be valued by
multiplying the $1,150 by the 100 Multiplier - Value indicated $115,000

2. ANNUAL - Finding an Annual Multiplier

Applied to larger income properties.
Example of determining the Multiplier
Properties that have sold for $1,000,000 have had annual gross incomes of $100,000.
The $1,000,000 selling price divided by the $100,000 annual gross income equals 10
Multiplier of 10 is indicated
Example of applying the Multiplier
A property in this area currently grossing $85,000 yearly would be valued by
multiplying the $85,000 by the 10 Multiplier - Value indicated $850,000

XII. MISCELLANEOUS INFORMATION REGARDING INCOME PROPERTIES

The following describes information covered in the State Exam that relates to income
properties, but is not directly associated with the appraisal approaches.

A. CASH FLOW - Describes the amount left after deducting payments of Principal
and Interest from the Net Income. Note: Depreciation attributed to the building
improvements is not included when calculating the "Cash Flow".
e.g.

Net Income

$ 20,000

Principal

- $ 4,000

Interest
CASH FLOW

- $ 14,000
+$ 2,000

102

B. NET SPENDABLE - Deduct from "Cash Flow" any amount attributed to payments
of income tax from owning the property.
e.g.

Cash Flow

$ 2,000

Tax paid
- $ 560
NET SPENDABLE $ 1,440

C. WHEN AN "ON-SITE RESIDENT MANAGER" IS REQUIRED BY LAW

a) Property contains 16 or more units in one complex.
b) Real Estate License not required for Resident Managers (would be required
if managing other separate properties for compensation).
c) The manager may be paid a salary (monetary or free rent).
D. CLEANING AND SECURITY DEPOSITS
Lease or rental agreement cannot enforce clause stating "Security Deposit NonRefundable"

1. Residential Income Property

Upon termination of tenancy, a tenant is entitled to:
a. Within 3 Weeks (21 days), the return of unused portion of cleaning and/or
Security Deposit. and,
b. An itemized statement of any deductions made.
2. Commercial Income Property
a. No maximum amount of Security Deposit.
b. The tenant is entitled to return of unused portions within 30 days of
termination and vacating premises.
c. An itemized statement of deductions is not required.
E. ADVANCE PAYMENT OF RENT TO LANDLORD
1. Landlord may demand first and last month's rent. Also a security deposit not in
excess of:
a. Unfurnished unit - 2x the monthly rent
b. Furnished unit - 3x the monthly rent
2. Leases of Six Months or more: Landlord may ask for any amount of advance
rent agreed upon.

103

XIII. THE APPRAISAL PROCESS

A. To define the problem (1st Step)
B. Make a preliminary survey
C. Collect other general information and specific data
D. Analyze the data
E. Correlation/Reconciliation, Arriving at Final Value Estimate (Final Step)
An appraiser takes into account the purpose of the appraisal, the type of property, and the
adequacy of data processed in each of the three approaches. The final estimate of value
is made as a result of reconciliation and correlation of all three Appraisal Techniques,
meaning they select the one found most reliable for the type of property being appraised.
Note: Averaging value conclusions is not part of the process.
If this type of property:
a. *Single Family Dwellings (sufficient comparables)

Conclusion based upon:

Market Data

b. *Single Family Dwellings (insufficient comparables)

Unique Properties (e.g. - Custom designed)

Cost Approach

c. Income Producing properties

Income Approach

*Generally Market Data utilized most often on Older dwellings; Cost Approach utilized most often
on newer properties.

XIV. THE APPRAISAL REPORT

Communication of the value conclusion. May be verbal. Most often is in
written form.
A. May be for a date in the past, but not a date in the future.
B. Important dates:
1. Date of the value conclusion: Usually date appraiser physically inspected the
property (Site Inspection).
2. Date of the report: The date report has been completed.
C. Three types of reports
1. Letter
Describes type of property, type of value sought, reason for appraisal, date of
estimate and signature of appraiser. Used by persons who are familiar with area
and property's location.

2. Form (Short Form/Check List)

Uses a form consisting of check-lists covering pertinent data on subject property.
Generally required by lenders and government agencies.

3. Narrative
A complete report usually issued for someone not familiar with the property or
area. Consists of maps, plot plans, charts, photographs, etc. The most
comprehensive and the most costly of the three reports.

104

Type of Appraisal Reports - Narrative (continued)

a. Introduction (The first portion of the report):
1) Page 1 - Title Page. Contains identity of property, date of value, for whom
value estimate is being made, and name of appraiser.
2) Page 2 - Letter of Transmittal. Contains Date of Value, Value Estimate and
Signature of Appraiser.
b. Remaining pages support 1) and 2) above.

XV. MISCELLANEOUS INFORMATION REGARDING APPRAISING

A. Common methods of quoting property values
Square foot or Acre - Residential or Industrial
Square foot or Front Foot - Residential Income or Commercial
Acre - Industrial or Agricultural
B. Ground Rent
Earnings from improved property that are attributed to the ground (land) itself after
deducting allowances for earnings attributed to the improvements.
C. Accrued Depreciation
The total amount of depreciation which already has occurred. Used by appraiser to
determine current value of improvements in Cost Approach.
D. Accrual for Depreciation
Making an allowance for future depreciation to recapture the "Return Of"
investment in the improvements. Used in the Income Approach to determine
income tax write-offs.
E. Depth Table (4-3-2-1- Rule)
Used by an appraiser to evaluate Commercial land.
1. A table that is used to estimate the value of the added depth of commercial lots.
2. Known often as the 4-3-2-1 Rule (4+3+2+1=10).
a. The deepest lot in the area is divided in the following manner:
4/10 (40%) of the value of the parcel is in the first 1/4 of depth of the lot;
3/10 (30%) of the value of the parcel is in the second 1/4 of depth of the lot;
2/10 (20%) of the value of the parcel in the third 1/4 of depth of the lot; and
1/10 (10%) of the value of the parcel in the fourth 1/4 of depth of the lot.
e.g. -

The deepest lot in the area is 200 feet deep. A lot which is 100 feet deep sells for
$140,000. What is the value of the 200 foot lot? Using the above breakdown we
can see that the 100 foot deep lot would have contained 4/10 (40%) and 3/10
(30%) or a total of 70% of the overall value of the 200 foot lot. Therefore the 100
foot lot sale price would represent 70% of what the 200 foot lot should sell for.
$140,000 = 70% of $200,000. Value of 200 foot lot is $200,000.

105

F. UNEARNED INCREMENT (also described as Appreciation)

An increase in value resulting from no effort on the part of the owner.
(Usual causes; population growth, inflationary trends, market conditions, etc.).

G. ETHICAL STANDARDS OF AN APPRAISER - The appraiser may not;

1. Discuss or report conclusions and/or valuations with any person except their client.
2. Appraise any property in which the appraiser holds any interest unless this fact is
disclosed in the report.
3. Base their compensation on a percentage of the estimated value or a predetermined
value.
4. Omit the use of any fundamental appraisal method without justifying the reason in
their report.
5. Accommodate the interest(s) of any person(s), which would influence an impartial or
unbiased estimate.

H. METHODS OF DETERMINING VALUE OF LAND

1. Abstraction
Where no vacant land sales are available. Procedure: Find sales of homes with lots
having similar characteristics. Using Cost Approach reproduce improvement new,
then deduct depreciation. What is left is land value.
2. Development Projection/Anticipated Use
Used to evaluate vacant acreage ready for development.

3. Comparison (Market Analysis)

Utilizes recent sales of similar properties.

4. Land Residual
Applied to income properties where the land value is the missing factor. Anticipated
net income and cost of improvements are known.

XVI. CONSTRUCTION TERMINOLOGY (Other Miscellaneous Terms)

Backfill
The replacement of excavated earth into a hole or against a structure.

Bearing Wall
A wall that supports the main load of floors and ceilings. Would be less likely to have doors or
windows. Must be taken into consideration when remodeling.

Bench Mark (also known as "Monument)"

Used by a Surveyor. A location indicated on a durable marker.

Board Foot
A unit of measurement for lumber. Each "Board Foot" would contain 144 cubic inches.
e.g. - The volume of wood in a piece measuring 12 inches x 12 inches x 1 inch.
Answer: 12 inches (wide) x 12 inches (deep) = 144 sq. inches x 1 inch (thick) = 144
cubic inches (one board foot)

106

Construction Terminology and Other Miscellaneous Terms (continued)

Bridging
Small wood or metal pieces used to brace floor joists.

BTU
British Thermal Unit. A measurement of energy to push out heat and/or air.

Compaction
Compacting added soil used to level a building site.

Conduit
Thin metal pipe through which wiring is strung. Used by an Electrician.

EER (Energy Efficiency Rating)

The higher the rating the more efficiently the energy is being utilized.

Elevated Foundation
Minimum "Crawl Space" under the floor is required of at least 18 inches with an opening of at
least 24".

Elevation Sheet
The blueprint page showing the outside heights and measurements of the buildings.

Flashing
Sheet metal or other material used to protect a building's roof from seepage of water.

Floor Plan
The blueprint which diagrams the dimensions of the rooms

Footing
The concrete base (contains reinforcement rod) on which the foundation wall sits.

Foundation Plan
The blueprint showing the components of the foundation.

Gable Roof
A two-sided roof.

Gypsum Board
Drywall, as opposed to plaster which is applied wet. Also known as Wallboard, Plasterboard
or sheetrock.

Hip Roof
A four-sided roof.

HVAC
Heating, Ventilation & Air Conditioning. This term most often found in commercial property
leases.

Joist
One of a series of parallel horizontal beams to which the subfloor and/or ceiling panels are
nailed. Supports the floor and ceiling loads.

Key Lot
The lot next to the corner. Backyards face into it, therefore considered the least desirable on
the block.

Kiosk (key-osk)
A multi-sided stand or container. Generally exam refers to the type found located in the aisles
of the shopping malls where vendors utilize them for business displays and sales.
107

Construction Terminology and Other Miscellaneous Terms (continued)

Orientation
The placement of the improvements on the land.

Penny
A way of measuring nails.

Percolation Test
A ground (soil) test for liquid/fluid absorption. Often given for septic tank use. Performed by a
Soils Engineer.

Pitch
The incline, angle or rise of the roof. The life of a roof is based on its pitch. The steeper the
angle or pitch, the longer the roof's life.

Plot Plan
The blueprint showing a lot in relationship to other lots, streets and sidewalks.

Potable
Relates to drinkable water. Non-potable water is non-drinkable.

Pyramid Roof
A four-sided roof coming to a point.

Ridge Board
The highest wood member of a roof. The board that runs horizontally across the top of the
roof to which rafters are nailed.

Shingles
Used to cover the roof and nailed to sheathing.

Sill (Mud Sill)

The lowest (first) wooden member which rests on the foundation fastened by anchor bolts.

Soil Pipe
The type of pipe used for sewage disposal. Used in plumbing.

Sole Plate
Usually a wooden 2 x 4 piece of lumber on which wall studs rest.

Subterranean Termite
Most destructive to wooden members of a building.

Studs (Studding)
The vertical 2 x 4s between floor and ceiling. Usually 16" or 24" from center to center.

Turnkey Project
Structure which is completed and ready to be occupied.

Walls
Standard height usually 96" (8 feet) from floor to ceiling.

Walk-Up
Refers to apartments without elevators.

Wider Lots
Most preferred by purchasers of residential lots.

108

Chapter 6
_______________

FINANCE & TAXATION

REAL ESTATE FINANCING

I. GOVERNMENT PARTICIPATION vs CONVENTIONAL
A. GOVERNMENT PARTICIPATION
Loans backed by Federal or State Agencies.

1. Federal
Loans are made through approved private or institutional lenders.
FHA - Insures lenders against loss.
VA - Guarantees lenders against loss.

2. State
Loans are made directly to qualified veterans from the California
Department of Veterans Affairs.

B. CONVENTIONAL
Loans made through private or institutional lenders. These loans are not insured or
guaranteed by government agencies. The lenders are responsible for their own
losses.
They may have loans guaranteed or insured by non-government
organizations by using Private Mortgage Insurance (PMI).
COMPARING THE TWO MAJOR PROGRAMS
Conventional

Government

Downpayment

Higher

Lower

Term (length of loan)

Shorter

Longer

Interest Rate

Higher

Lower

Monthly Payments (if same balance)

Higher

Lower

Loan-to-value Ratio
e.g. - Loan to Value Ratio

Lower
Value $100,000
Loan $ 80,000

Higher
Value $100,000
Loan $100,000

109

II. TWO TYPES OF LENDERS - Institutional vs Non-Institutional

A. Institutional
Commercial Banks (State or Nationally chartered)
Savings and Loan Associations (State or Federally chartered)
Life Insurance Companies
Mutual Savings Banks (Located Predominantly in Northeastern U.S.)
Credit Unions

B. Non-Institutional
Thrift Companies
Endowed Universities
Private Investors (Individuals or groups. e.g. - sellers, brokers)
Pension Funds
Mortgage Companies - Considered lenders if loaning money directly to the borrower.
Mortgage Broker - Negotiates loans. Provides a service, but doesn't actually loan money.
Mortgage Banker - Makes direct loans to borrowers.

III. L E N D I N G
A. FEDERALLY BACKED LOANS (VA and FHA)

1. Federal Housing Administration (FHA)

In operation since 1934. Created under the "National Housing Act".
a.

Title I
Gives FHA the authority to insure loans made to homeowners by private or
institutional lenders for:

1) Repair, alteration or improvement of presently owned home, or

2) Purchase of qualified Manufactured Homes (Mobile homes).
b.

Title II
Gives FHA authority to insure loans made through approved lenders
against loss on loans to purchase 1 to 4 unit and larger properties.

110

Characteristics of Title II Loans

1) Use of borrowed funds
To buy existing property or for new construction.
2) Properties Must Be Owner-Occupied at the Date of Purchase
3) Insurance Provided by FHA
Purpose of Insurance: To repay lender in the event borrower defaults.
a) Mortgage Insurance Premium (MIP) - One lump-sum premium paid at
time of loan acquisition provides 1 years coverage. Can be financed into
original loan. And additionally
b) Mutual Mortgage Insurance (MMI) - 1/2 of 1% added to the lenders
annual rate. Paid over a designed time period.
4) Source of Funds: Approved Lenders.
5) Loan Points
May be negotiated between buyer and seller. May be totally paid by one party
or split between them.
6) Prepayment Penalty: None
7) Downpayment
3% on the first $25,000 and 5% on the excess. Minimum based on lower of
either the sales price or appraised value.
8) Loan Term: 30 years or 3/4 of the remaining economic life of the buildings.
9) Maximum Loan Amount: Based on Appraised Value (not asked on exam).
10) Interest Rate: Any rate mutually agreed upon by the borrower and lender.
11) Assumability: Loan is assumable if purchaser qualifies.
12) Secondary Financing: Allowed at time of purchase.

c. Title III
This title created a Secondary Money Market
1) Money Market defined:
a) Primary Money Market - Where loans are originated between borrower and

lender.
b) Secondary Money Market - Where existing loans are bought and sold
between lenders. On the exam lenders are also identified as Beneficiaries,
Mortgagees or Loan Arrangers.

2) Major participants in the Secondary Money Market

a) Federal National Mortgage Association (FNMA/Fannie Mae)
Purchases existing Government-backed and select conventional loans.
b) Government National Mortgage Association (GNMA/Ginnie Mae)
Purchases loans Fannie Mae does not purchase. e.g.- Low income housing
loans and housing loans for the disadvantaged.

c) Federal Home Loan Mortgage Corporation (FHLMC/Freddie Mac)

Purchases loans made through members of the Federal Reserve System
(Banks) and Federal Home Loan Bank System (Savings & Loans).

111

2. U. S. Department of Veterans Affairs (USDVA)

In operation since 1944. Created by the "Servicemen's Readjustment Act"

a. Programs available to qualified veterans

Commonly referred to as VA or GI Loans
1) To help purchase:
a) Farms
b) Farm Equipment
c) Mobile Homes
d) Home Sites
e) Condominiums
f) Single Family Dwelling
g) Multiple Family Dwellings up to 4 units
Must intend to occupy at the time of purchase.
h) Education Assistance
i) Business Loans

b. Procedure to acquire loan

1) Veteran obtains a Certificate of Eligibility.
a) Issued by USDVA. This is veteran's proof of eligibility for loan guarantee.

2) Veteran locates approved lender.

a) Lender orders credit-check to credit qualify veteran.

3) Lender orders appraisal on selected property.

a) Appraisal is sent to USDVA.
b) Based on appraisal, USDVA issues a CRV (Certificate of Reasonable Value).
c) Based on CRV lender may:
(1) Loan up to 100% of CRV. If purchase price is more than CRV, veteran
may pay the difference.

4) Veteran's Affairs guarantees loan to lender.

a) The Guarantee: Although not set by law, but as most loans are sold
to either Fannie Mae or Freddie Mac, these organizations want their
maximum loans to be set at 4 times the current guarantee. e.g. - If
current guarantee is $50,000 then their maximum loan would be $200,000
($50,000 x 4).

b) Liability in the event of foreclosure and loss;

(1) V.A. liable for losses to the lender based upon guarantee.
(2) Veteran liable for losses paid by USDVA under the guarantee.
(3) If loan assumed by another, USDVA must release veteran from liability.

5) Veteran not obligated to proceed if:

a) Veteran doesn't qualify for loan, or
b) Property doesn't appraise for at least what veteran is offering.

112

U. S. Department of Veterans Affairs Loans (continued)

c. Characteristics of USDVA Loan Program

1) Source of Funds
Approved Lenders

2) Loan Fees (Points):

a) Origination Fee usually charged by lender (maximum 1 percent).
b) Funding Fee charged by USDVA.
c) Fees may be paid by the buyer, the seller, both or a third party.

3) Prepayment Penalty
None

4) Downpayment
USDVA doesn't require downpayment unless CRV is less than purchase
price.

5) Loan Term
Averages 30 years.
maximum loan term.

May be re-amortized at later date, but only for

6) Maximum Loan Amount

No maximum - Lender may loan up to 100% of CRV and still receive
maximum guarantee.
Secondary financing possible under certain
conditions, determined on a case by case basis.

7) Interest Rate
Whatever rate borrower and lender agree upon.

8) Assumability
If lender permits loan assumption veteran is released from liability on the
loan.

9) Reuse of Loan Guarantee

May be used more than once.

113

B. STATE OF CALIFORNIA - Cal-Vet Program

CALIFORNIA FARM AND HOME PURCHASE PLAN
Established in 1921 - Assists qualified veterans to purchase a home (Single Family
Dwellings), Condominium, Townhouse, Co-op, Farm, Mobile Home, or borrow for home
improvement.
1. Eligibility Requirements: (Expires 30 years after discharge):
a. 90 days or more active duty in armed forces of the U.S.
b. Resident of State of California. Widows of veterans also eligible.

2. Procedure: Veteran applies to California Depatrment of Veterans Affairs (DVA) to

borrow the money from State of California.
3. Source of Funds: Through General Obligation Bonds and Cal-Vet Revenue
Bonds.
4.

Loan Fees: Loan Origination Fee charged to veteran.

5.

Prepayment Penalty: If loan is paid-off within two years, there is a

prepayment penalty. The penalty is 2 percent of the original loan amount.
there is no penalty after two years.

6. Downpayment : One is required. However, to date, no question on exam.

7. Loan Term: 30 years, but can be extended up to 40 years.
8. Maximum Loan Amount: There are maximums, but not asked for on exam.
9. Interest Rate: Variable. Based on cost of repaying bonds and operating the
California DVA.
10. Assumability: May be assumed by another California Veteran only.
11.Secondary Financing: May be obtained at the time of purchase.

Must not
exceed, together with the first loan, more than 98% of Department's appraisal of
property.

12.Title to Property:
a. Conveyed from seller to Califonria DVA.
b. California DVA finances for veteran through use of a Land Contract (Contract of
Sale);
c. Califonria DVA (Vendor) retains Legal Title (deed);
d. Veteran (Vendee) holds Equitable Title.

13. Insurance (required): Veteran is required to have Fire and Hazard Insurance,
Life and Disability Insurance and Disaster Indemnity Insurance.

114

IV. ADDITIONAL LENDING INFORMATION

A. LENDING TERMS:

1. Loan-to-Value Ratio
Maximum amount lender will loan is based on a percentage of Appraised Value
e.g.- Buyer offers to buy for $100,000. Lender agrees to make a 90% Loan. Borrower
expects to borrow $90,000. Appraisal comes back at $95,000. Per lender's
agreement, the loan is $85,500 (90% of $95,000 appraised value).
Contracts should be written subject to buyer qualifying for loan and property
appraising for purchase price.

Normal Loan-To-Value Ratios (Residences)

Highest - Banks and Savings and Loan Associations
More conservative - Private lenders
Lowest - Life Insurance Companies

2. Prepayment Penalties
A penalty charged to borrower by lender for paying-off loan before its due date.

a. Conventional Loans (Single Family Dwellings)

1) No Prepayment Penalty can be charged after 5 years of the execution of
mortgage or deed of trust.
2) Borrower can pay up to 20% of original loan amount in any 12 Month
period with no penalty on that amount paid.
3) Maximum Penalty - 6 Months advance interest
b. Government Participation Loans
See under "Prepayment Penalty" on previous pages.

3. Trust Funds (Impounds)

Money collected in advance and held in trust to pay for such things as
borrower's property taxes and/or fire insurance premiums, etc.

a. Lenders add to monthly payments of principal and interest an amount equal

to 1/12 of the annual amounts due for payment of the,
1) Property Taxes, and
2) Fire Insurance Premiums.
b. The initials PITI symbolize the terms - (P) Principal, (I) Interest, (T) Taxes,
and (I) Insurance.
c. Required on VA, FHA and most conventional loans.

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4. Loan Points
Originally created to equalize yields between Government Backed (fixed rate) and
Conventional Loans (non-fixed rate).
Example : Conventional Loan - $40,000 @ 10 1/2% = $119,600 (yield)
GI Loan
- $40,000 @ 10%
= $118,000 (yield)
Interest and yield difference
1/2%
$1,600 (yield)

Computing Points (Using the above example)

Step 1 - Determine the difference in the interest rates...1/2%
Step 2 - Convert into eighths of a percent...1/2% = 4/8%
Step 3 - Charge a "One Point Fee" for each 1/8% difference in the rates.
Step 4 - Charge 4 Points (4/8% difference)

Definition of a Point: One Point = 1 percent of new loan amount.

Outcome of above example
Lender can either loan money at:
a. 10 1/2%, and yield the lender over life of loan $119,600 or;
b. 10% ($118,000) + 4 pts ($1,600), and yield the same $119,600.

5. Depositor Insurance (Savings Accounts)

FDIC - Federal Deposit Insurance Corporation
Covers State and National banks and Federal Savings and Loan Associations.

6. Leverage
A method of borrowing other people's money (OPM) to purchase an
investment, thereby controlling more property value with a smaller amount of
your own money. The larger the loan, the greater the "Leverage".

7. Nominal Interest Rate - The rate that appears in the note.

8. Effective Interest Rate - Disclosed under Truth-In-Lending

Includes in
it's calculations specific additional charges in order to calculate the "Real Rate
of Interest."

9. Participation Loan
A loan where lender not only receives a return on money loaned (interest), but
also shares an ownership interest in the property.

9. Seasoned Loan - Loan with past record of prompt and/or good payments.
B. LENDER CHARACTERISTICS
1.
2.
3.
4.
5.

The most first home loans - Savings and Loan Associations

The most junior loans - Private Investors
The most construction loans - Commercial Banks
The largest commercial/industrial loans - Life Insurance Companies
Single family residences - Life Insurance Company
Least likely to refinance or make new construction loans.

6. Federal agency making long-term loans to farmers - Federal Land Bank

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C. FEDERAL DISCLOSURE STATEMENTS

Required to be provided borrowers

1. Truth In Lending Act (implemented by Regulation Z)

a. Purpose: To promote informed use of consumer credit by requiring
standardized disclosures regarding credit charges.
borrowing money.

Shows true cost of

b. Time of Disclosure: Before consummation of credit transaction.

c. Exemptions to the Law
1) Credit extended primarily for Business, Commercial or Agricultural
purposes. Business includes credit to acquire, improve or maintain nonowner occupied properties regardless of number of units.
2) Credit over $25,000 (Doesn't apply if credit for loan is secured by real
property or personal property expected to be used as a principal place
of residence.)

d. Enforcement by: The Federal Trade Commission (FTC)

Penalties for non-compliance
1) If Desist and Refrain issued and ignored - $10,000 per day.
2) Unfair and deceptive practices - $10,000 per violation.

e. Rescission
1)
2)
3)
4)

Right to Rescind: When taking money out of property.

No right to rescind: When funds are used to purchase property.
Rescission Period: Midnight the third (3rd) Business Day.
Waiver of Rescission: Only for a bonafide emergency.

f. Truth-in-Lending Disclosures
1). Required by:
a) Any person who extends credit:
(Assumptions and Refinancing are considered new transactions)
(1) More than 25 times a year, or
(2) More than 5 times a year for transactions secured by real property, if:
(a) Subject to a finance charge, or
(b) By written agreement paid in more than 4 installments,
(c) And paid to person who extended credit.

2) Form of Disclosure
a) Must be more conspicuous than other required disclosures.
b) Disclosures must be separated from everything else,
(1) On a separate page or enclosed in a box, and
(2) In different or bold print type.

117

3) Required Disclosures (New loans, refinance or assumptions)

a) Finance Charges
(1) Included as Finance Charges
(a) Interest
(b) Loan Fees
(c) Investigation and Credit Reports
(d) Premiums for Mortgage Guarantee
(e) Escrow
(f) Tax Service
(g) Structural Pest Control Inspection
(2) Not Included as Finance Charges: Title examination and Insurance,
Seller's Points, Abstracts, Survey, Preparing documents, notary fees,
appraisal fees, impounds for property taxes and fire insurance, and
anything not considered a finance charge.

b) Interest Rate
(Shown as the Annual Percentage Rate - APR)
(1) If Variable Interest Rate Loan (VRM)
On loans secured by borrower's principal dwelling.
(a) If Rate Can Increase Within One Year
i. Circumstance triggering rate change;
ii. Expressed limitation on increase;
iii. The effect of an increase;
iv. Example of payment terms resulting from any change.
(b) If Rate Can Change After One Year
i. The fact transaction contains a variable rate feature, and
ii. Notification that variable rate disclosures have been provided
and the variable rate feature explained.

g. Advertising Consumer Credit

1) Annual Percentage Rate Required (APR)
If a financing charge expresses a rate, the rate quoted must be the APR
(Annual Percentage Rate). If a variable rate, additional disclosures
required.
2) Terms that trigger additional disclosures
a) The amount of percentage of any downpayment, even if implied
(e.g. - 90% financing implies 10% down);

b) The number of payments or period of repayment;

c) The amount of payment;
d) The amount of any finance charge.

3) If above trigger terms are used, advertisement must also include;

a) Amount of percentage down,
b) Terms of repayment, and
c) Annual Percentage Rate.

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2. Real Estate Settlement Procedures Act (RESPA)

Sets forth special disclosure requirements for non-exempt lenders.

a. Applicable to: Federally related loans for sale or transfer of 1 to 4 dwelling

units, includes condos, co-ops, or mobilehomes.

b. Exemptions: 25 or more acres of land, loans not for purchase or transfer,

vacant land, loan assumption; construction loan, if to be converted to
finance first user, construction, if land already owned; purchase for resale,
and use of land sales contract (Installment Sales Contract).

c. Special Information Booklet & Good Faith Estimate of Settlement

Costs
1) Must be provided to borrower upon application for loan, or
2) Mailed to borrower no later than 3 days thereafter.

d. Uniform Settlement Statement

1) Borrower may request right to inspect statement at least one day prior to
Settlement.
2) Must be delivered or mailed to borrower and seller, or their agents, at or
before settlement unless waived. If waived, must be delivered or mailed
as soon as practicable after Close of Escrow.

e. Fees
No charge may be made by the lender for providing the following;
1) Good Faith Estimate
2) Special Information Booklet
3) Uniform Settlement Statement

f. Lender May Require Use of Certain Firms

Relates to: Legal Services, Title Insurance and Title Examination.
1) Borrower must pay for services.
2) Lender must advise borrower of requirement.
3) Lender must disclose whether these people do business with the lender.

g. Kickbacks/Unearned Fees Prohibited

Fees can be paid for goods provided or services actually performed by:
Attorneys, Title Companies, Lenders or Real Estate Brokers. No gratuitous
payments.

h. Penalties: Treble damages on amount of settlement service.

i. Loan Trust Fund Maximum:

Two months deposit in excess of amount

needed for payment of taxes and insurance.

119

TAXATION
I. REAL PROPERTY TAXES
(Assessed by County Assessor. Taxes collected by County Tax Collector)

A. Priority:

Property Tax & Tax Assessment Liens take priority over all other liens
no matter what their dates of recording .

B. Procedure:
1. Assessor's Department Appraises Properties
a.
b.
c.
d.

Purpose: To establishes the tax base for the county.

Assessment of Land and Improvements: Values are indicated separately.
Value identified: Fair Market Value (not purchase price).
Assessed Value: Established at 100% of the Fair Market Value.

Note: Utility companies are assessed by the State Board of Equalization.

2. Assessment Lien Established

a. Lien recorded against: Property, in name of property owner, on
b. Lien date: January 1st prior to beginning of property tax fiscal year.

3. County Board of Supervisors sets the Tax Rate

a. Present Rate: 1% of Assessed value, plus any taxes, which have been
voter approved.

4. Tax Collector Sends Tax Bill and Collects Taxes

a. The Tax Bill
1) Land & Improvements: Shown separately on bill.
2) Tax Rate: 1% of Assessed value
(land & improvements have the same tax rate)
3) Maximum increase from previous year: 2% (unless improvements added).
4) Tax on added improvements: Taxable upon improvement's completion.
5) Supplemental tax bills: Sent if improvements are added during year.
6) Tax year: July 1st through June 30th of the following year (Fiscal Year)

b. Collection of Property Taxes

1) 1st Installment - Due: November 1st
Delinquent if not paid on or before: December 10th
Pays for: July 1st through December 31st
2) 2nd Installment - Due: February 1st
Delinquent if not paid on or before: April 10th
Pays for: January 1st through June 30th

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Real Property Taxes (continued)

5. Delinquent Property Taxes

a. If unpaid for previous Fiscal Year
1) Property sold to State: "Stamp Sale" (not a transfer of title).
2) Significance of the sale: Starts statutory 5-Year Redemption Period
3) After 5-Year Redemption Period passes: Property can be auctioned to
highest bidder, who receives a Tax Deed issued by State.

6. Exemptions to Property Taxes

a. Totally Exempt
1) Growing crops
2) Government owned properties
3) Special non-profit organizations
4) Cemetery parks

b. Exempt for limited time periods

1) Fruit and/or Nut Trees (Commercial Growth) - If less than 4 years old.
2) Grapevines (Commercial growth) - If less than 3 years old.
3) Veteran's - Qualification based on assets. Owner of record 1/1 and file by
4/15 prior to tax year. Exemption $4,000 off assessed value. Must re-file each
year.
4) Homeowner's - Owner of record 1/1, file by 4/15 for full exemption. If filed
after 4/15 but before bill is issued a partial exemption allowed. Terminates
upon sale or moving from Premises. Exemption $7,000 off of assessed value.
No need to re-file each year.

II. PERSONAL PROPERTY TAXES

A tax assessed on certain business property and personal luxury items.
A. SECURED PERSONAL PROPERTY
Also owns real property where located.
1. Assessment date: January 1st prior to the Property Tax Year.
2. Payment due: November 1st (Paid with first installment of Real Property Taxes).
3. Delinquent: If not paid on or before December 10th.

B. UNSECURED PERSONAL PROPERTY TAXES

Person paying personal property taxes does not own the real property where
taxable personal property is located.
1. Assessment Date: January 1st prior to the tax year.
2. Payment due: Payment is due upon assessment date.
3. Delinquent: If not paid by August 31st.

121

III.TAX ASSESSMENT LIENS (Special Improvement Districts)

Allows Cities/Counties by enacted laws to require certain improvements be added
to properties, such as; sewers, sidewalks, street lights, etc., and allows local authority
to bill property owner for cost of such improvements.
A. COST TO OWNER
Determined by dividing total front footage of properties being improved into the
total bill to determine each owner's proportionate share.
B. METHOD OF PAYMENT
Most commonly used method -The Street Improvement Act of 1911.
This act offers three alternate methods for paying assessed amount,
1. Pay all within 30 Days,
2. Pay part within 30 Days - Let balance go to Bond,
3. Pay nothing within 30 Days - Let entire amount go to Bond.

IV. REAL PROPERTY TRANSFER TAX

Also known as Documentary Transfer Tax. A tax which must be paid to the County
(if due), in order to record a deed.
A. DETERMINING THE AMOUNT OF TAX TO BE PAID
1. Tax Rate: $.55 per $500 of the taxable amount or any fraction thereof.
2. Tax charged on: New Loans and cash used for purchase.
3. Tax not charged on: Existing Loans (Assumed loans).
Example: Purchase Price

$60,000

Terms of purchase
Assumed loan

$40,000

Cash downpayment

$10,000

2nd loan to seller

$10,000

Amount subject to the tax

Tax would be levied on the New Loan of $10,000 and the "Cash
down of $10,000. The pre-existing loan of $40,000 is not subject to
the tax.
Computing the tax
20,000 (taxable) divided by $500 = 40
40 x $.55 = $22.00 Tax due

122

V. PERSONAL INCOME TAX

A. STATE PERSONAL INCOME TAX

(no questions currently on exam)

B. FEDERAL PERSONAL INCOME TAX

Federal Income Tax represents a Progressive Tax System (the more you make,
the higher the tax rate).

1. Sale of Personal Residence (no currently being asked on state exam)

a. Special Tax Exemption - Qualifications:
1) No age limitation.
2) Property must have been the owner's personal residence for at least 2 years.
3) May claim exemption sooner than 2 years if move due to job relocation
(amount would be prorated).
4) The exemption may be used as often as can qualify.

b. The Exemption
1) No tax due on the first $250,000 in profit from the sale if claiming as a singleperson or, $500,000 if claiming as a married couple.

2. Investment Gains and Losses

Long Term Gains. Certain investments held a minimum of one year prior to
sale are subject to a preferential maximum tax rate of 20% on the profit.

3. Miscellaneous Information
a. Rents received in advance by Landlord/Lessor
Taxable in the year received.
b. Interest received in advance (Points received by a lender)
Taxable in the year received.
c. Loan Points paid by borrower
1) Purchase Money Loan: Deductible in the tax year paid.
2) Refinance: Written-off over life of loan. Balance may be taken when loan paid in full.

d. Tax Deductible Items

1) Personal residence: Property taxes and mortgage interest.
2) Residential income property: Property taxes, mortgage interest and insurance.

e. Capital Improvements
1) Personal residence - Add to the Cost Basis (Cannot be depreciated).
2) Income, Trade or Business Property - Add to the Cost Basis; additionally can be
depreciated over life of improvement.

f. Sale of a personal residence

1) Profits: Taxable
2) Losses: Not deductible

g. Maximum loss on the sale of Income, Trade or Business Properties

$3,000 per year unless balanced-out against a capital gain.

123

4. Deferring Payment of Income Tax

Methods of partially or totally deferring payment of tax on profit made when
transferring ownership of real property.

a. Method 1 - EXCHANGING
A method of deferring tax by trading properties

1) CLASSIFICATIONS of Property Used for Exchange Purposes

Tax Deferred
Exchange

May Take
Depreciation

PERSONAL RESIDENCE

NO

NO

DEALER PROPERTY (Held for sale to customers)

NO

NO

*INVESTMENT (Raw or vacant land)

YES

NO

*INCOME

YES

YES

*TRADE OR BUSINESS

YES

YES

*Classified as "Like Properties"

2) QUALIFYING
a) Exchanging any "Like" for "Like" property receives benefit of Exchange.
b) Qualification individually determined (both properties don't have to
qualify).
Example - Able owns a 4-plex and wishes to exchange for Baker's residence,
which Able intends to use for rental purposes.
Outcome: Able is exchanging "Like for Like" and would qualify for the tax deferred
exchange. Baker is exchanging a residence (Not "Like") for a four-plex and would
not qualify for a tax deferred exchange.

3) PROCEDURE FOR EXCHANGING

Example
"A" and "B" wish to perform an exchange in order to defer income taxes to a
later date.
a) "A" owns a duplex: Current market value of $100,000, current lien of $70,000.
b) "B" owns a triplex: Current market value of $135,000, current lien of $80,000.

Step 1 - Determine Each Property's Equity.

Equity: The amount left after deducting existing liens from current value.
"A"
$100,000 Current Value
$ 70,000 Existing Lien
$ 30,000 Equity

124

"B"
$135,000 Current Value
$ 80,000 Existing Lien
$ 55,000 Equity

Step 2 - Balance Equities

In an exchange, equities traded must be equalized. If there isn't
equal equities, then additional amounts must be added to balance
the equities.
"A" is giving $30,000 equity, but receiving $55,000;
"B" is giving $55,000 equity, but receiving only $30,000;
"A" must provide "B" with an additional $25,000 in value.
"A"
"B"
$30,000 Equity
$55,000 Equity
$25,000 Value added
-0- Value added
$55,000
Balanced
$55,000
"A" receives: "B's" property, the $80,000 debt.
"B" receives: "A's" property, the $70,000 debt and $25,000 in value.

Step 3 - Determine the Taxable Part of the Exchange

Boot - Anything received in exchange other than equity being traded.
Boot is the taxable part of the exchange. Most exchanges have Boot.
In the Step 2 Example - "A" would take "B's" property, taking over the
$55,000 Equity. "B" would takeover "A's" property receiving the
$30,000 Equity and receiving an additional $25,000 to BOOT. This is
taxable to "B", as "B" received the $25,000 (boot).
Mortgage Relief - Is received when exchanging properties and going
from a larger loan debt into a lower loan debt. It is a form of boot.
In the Step 1 Example - "B" would give up an $80,000 debt and
takeover a $70,000 debt, thus being relieved of $10,000 in loan debt.
This difference would be Mortgage Relief and taxable to "B" (if there
should be an amount subject to tax).

Step 4 - Determining if Tax is to be Paid or Deferred

The profit or loss in a real estate transaction is calculated as the
difference between the "Adjusted Cost Basis" at the time of sale
or exchange, and the selling price or exchange value of the
property. To work this out, you must know the "Adjusted Cost
Basis" of the property.
The figures below were created for the purpose of example.
Example: "A's" Adjusted Cost Basis is $50,000
"B's" Adjusted Cost Basis is $70,000
If properties were sold rather than exchanged
"A's" profit - ($100,000 minus the $50,000) $50,000
"B's" profit - ($135,000 minus the $70,000) $65,000
(Next page shows tax implications of the exchange for both "A" and "B")

125

Tax Implications of the Sample Exchange

Property Owner "A"
Realized gain

$50,000

Boot Received (if any)

-0-

Mortgage Relief Gained (if any)

-0-

Recognized Gain (Taxable)

-0-

Amount Deferred

$50,000

Property Owner "B"

Realized Gain

$65,000

Boot Received (if any)

$25,000

Mortgage Relief Gained (if any)

$10,000

Recognized Gain (Taxable)

$35,000

Amount Deferred

$30,000

Step 5 - Carrying Cost Basis over into Property Exchanged

Easiest method: Deduct deferred profit from value of
property into which it was exchanged.
Example: "A" had a $50,000 deferred profit. "A" exchanged into
a property with a value of $135,000.
$135,00 value minus $50,000 deferred profit = $85,000
New Adjusted Cost Basis

b. Method 2 - INSTALLMENT SALE

1) Purpose
To spread realized profit over more than one tax year, thereby lowering
taxpayer's tax bracket (percentage of tax paid on profit received).

2) To Qualify
Seller receives money from sale over at least two tax years.
Example: "A" sells property receiving a $100,000 taxable profit. Under current
law, they may be taxed in a 10% to 39% tax bracket. In order to keep the rate in a
lower bracket, "A" decides to take the payments over a 10-year period at $10,000
per year. In doing so, when adding this extra amount to their usual annual income,
the amount of tax paid on the extra $10,000 shown each of the following 10 years
would be overall less than if taxed all in one year.

126

5. TAX PLANNING
Tax Planning Starts Prior to Acquisition

A. SALE/LEASEBACK
Selling a property you own, then leasing it back from the buyer.

1. Advantage to the Seller

a. The ability to Free-up equity in property to use for other purposes.
b. The rent paid can be written-off as a business expense.

2. Advantage to the Buyer

a. They have purchased a depreciable asset.
b. They have a good qualified tenant (previous owner).

B. REAL ESTATE SYNDICATES

Formed for tax and/or legal purposes
Under regulatory control of the Department of Corporations.
A Syndicate - A legal entity created to acquire a specific (identified) property.
A Blind Pool - Money is pooled (collected), but the investment is not yet
determined.

1. Corporation
An artificial person, a legal entity (Minimum three officers required)
a. Disadvantage: Double taxation
Corporation pays tax on corporate profits, issues dividends to stockholders;
stockholders pay tax on dividends.
b. Advantages
1) Limited in liability to value of stock
2) Centralized Management

2. General Partnership
Title is in name of partnership, individual partner(s), or trustee appointed
by partnership.
a. Disadvantage: Each Partner liable for partnership debts. Personal assets
can be liable.
b. Advantage: No tax on partnership, each partner being liable for own tax
liability.

3. Limited Partnership
Historically chosen as most common method of forming Syndicates.
a. Disadvantages: Losses not deductible.
b. Advantages to Limited Partners: General Partner(s) has unlimited
liability, Limited Partners are liable only to amount of their investment.

127

4. Real Estate Investment Trust

a. Disadvantage: No depreciation passes through to investor.
b. Advantages
1) Can continuously buy and sell properties,
2) Taxed only on distributions (No double tax),
3) Limited in liability to amount of investment.

128

Chapter 8
______________

PERSONAL PROPERTY - BUSINESS OPPORTUNITIES - ESCROW

PERSONAL PROPERTY
I. PERSONAL PROPERTY
That property which is not real property.

A. Is Tangible or Intangible
1. Tangible: Items that may be physically possessed.
2. Intangible: Items having no physical substance.
e.g. - Rights given by contract, labor, etc.
B.

Title is transferred by: Delivery of possession

C.

Evidence of title transfer: Bill of Sale

D.

Security interest created by use of a: Security Agreement

E.

Security interest perfected by filing a: Financing Statement (See Below)

II. BUSINESS OPPORTUNITY TRANSACTIONS

A. Uniform Commercial Code
1.

Security interest perfected by a: Financing Statement (Form UCC-1)

a. Financing Statement filed with County Recorder if:
1) Consumer goods;
2) Growing crops;
3) Uncut timber;
4) Mineral, Oil or Natural Gas rights.

b. Financing Statement filed with the Secretary of State in Sacramento

for: All other secured property.
c. Filing is valid for: 5 years (may file a continuance).
d. Failure to file: May lose priority against other creditors.
e. Security Interest Released: By filing Termination Statement (Form UCC-2).

139

B. BULK SALE LAW

The Law: Governs bulk transfer of goods that are not a transfer in the ordinary
course of the transferor's business. Pertains to transfers of materials, supplies,
merchandise, equipment, or other inventory.

Purpose of Law: To afford merchant's creditors an opportunity to satisfy their

claims against merchant to whom they have extended credit, before merchant can
transfer goods to another and leave with the proceeds of the sale.
1.

Requires A Public Notice:

a. From Purchaser (transferee) to Seller's (transferor's) Creditors by;
1) Recordation of notice in the Office of the County Recorder in the county where
property is to be transferred or sold; and
2) Publication of notice at least once in a newspaper of general circulation in the
judicial district in the county where sale is to occur.

b. Purchaser Sends registered or certified copy to County Tax Collector

Must be in county where transfer is to take place.
Note: All above must be done at least 12 Business Days prior to transfer of goods.

c. Notice must indicate;

1) A bulk transfer is about to be made;
2) Names and business address(es) the transferor(s);
3) Name of transferee(s) (unless sold by auction);
4) Place of sale;
5) Location and general description of goods to be sold;
6) The date which, on or after, sale will be commenced.
Note:

If sale by auction, Auctioneer is required to provide the required

Notice.

d. Effect of Non-Compliance;
1) Does not invalidate the sale between transferor and transferee.
2) As to Creditors of transferor who hold valid claims, transfer is considered
"Fraudulent and Void".
3) In the event sale is by auction, the auctioneer will be held personally liable to
creditor for sums owed by transferor. Therefore the sale would not render the
transfers fraudulent and void.

140

C. CALIFORNIA SALES AND USE TAX

1.

Tax Imposed Upon: Tangible Personal Property.

2.

Tax Rate: Not necessary to know for state exam.

3.

Seller's Permit required: When operating a wholesale or retail business.

4.

Clearance Receipt: Indicates that there are no past or current sales taxes,
interest or penalties due from previous owner.
Equalization.

5.

Issued by the State Board of

Successor's Liability: If no Clearance Receipt issued, the purchaser will

take over liability for any outstanding unpaid taxes, interest and penalties.

6.

Sales Tax levied on (when business sells): Furniture and Fixtures.

7.

Sales Tax not levied on (when business sells) : Stock in Trade & Goodwill.

D. ALCOHOLIC BEVERAGE CONTROL

1. Administration of the Alcoholic Beverage Control Act:
Department of Alcoholic Beverage Control (ABC).

2. Licenses issued to:

a. Approved Persons or Entities:
1) Adult persons;
2) Partnerships;
3) Fiduciaries and;
4) Corporations.

b. An Approved Location.
1) Reasons location may be disapproved:
a) If in the immediate vicinity of a,
(1) School,
(2) Church,
(3) Playground
b) An over concentration of licenses in an area,
c) The creation or aggravation of a police problem, etc.

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Alcoholic Beverage Control (continued)

3. On-Sale General and Off-Sale General licenses

a. Licenses are limited in number by State Statutes.
b. Licenses are issued in each county based on population.
c. A lottery is utilized to select the name of new license applicants. If name
drawn and applicant is qualified, license is issued.
Note: A license won't be issued to a Private Club unless in operation at least 2 years.

4. Must be done prior to transfer of a license:

a. File a Notice of Intended Transfer with the County Recorder.
b. Establish an escrow.

5. 30 day waiting period after posting: To allow for protests.

6. License must be put into use within 30 days after issuance:
Unless premises are under construction.

7. Speculation in Liquor Licenses: Condemned by the ABC.

8. Reselling a License - General On-Sale or General Off-Sale
a. If sold within 5 years of date of issuance: Maximum sales price is $6,000.
b. After 5 years from date of issuance: No limitation on price or consideration.

9. Fingerprinting: Required with application for license.

E. FINANCIAL STATEMENTS
1.

Balance Sheet - The historical record showing an individual's or company's

Net Worth as of a certain date.
ASSETS minus LIABILITIES = NET WORTH

2.

Profit and Loss Statement - A financial report listing income and

expenses over a given period of time to determine whether the business has
produced a profit or loss.
INCOME minus EXPENSES = PROFIT or <LOSS>

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F. ESCROW
1. PURPOSE: A short lived trust arrangement to which a third person (escrow
holder) is named Agent to act as stakeholder (acts on instructions) for a
specific transaction.

2. ESCROW HOLDER
a. Functions are to solicit and perform escrow transactions:
1) Licensed by: The Commissioner of Corporations
2) Required to: Post a Bond

b. Exceptions to the above requirements;

1) Banks
2) Savings and Loan Associations
3) Title Insurance Companies
4) Attorneys
5) Real Estate Brokers
When representing either or both parties in the negotiations while
performing any duties for which a real estate license is required.

3. ESCROW CREATION
a. Requires two essential elements:
1) A binding contract between parties entering escrow (deposit receipt,
contract of sale, an exchange agreement, etc.), and...
2) A conditional delivery of all necessary transfer instruments to escrow
holder.

4. RESTRICTIONS ON ESCROW AGENTS

a. Cannot pay referral fees to anyone except for normal compensation of it's
own employees;
b. Commissions or fees paid to brokers or outsiders for sending clients to a
particular escrow company are prohibited;
c. Commissions cannot be paid prior to actual closing and completion of
escrow;
d. Real estate brokers may not select an escrow holder as a condition for their
services, but may recommend an escrow company if requested to do so by
the parties.

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5. SCOPE OF AGENT'S AUTHORITY

Limited to following escrow instructions
a. Acts as Agent of both parties equally until Escrow is completed.
Note: Not considered an Employee or an Independent Contractor.

b. Acts as a Separate Agent of Each Party.

Once the conditions of escrow are performed escrow agent becomes a
separate agent of each party individually for the following purposes;
1) For the Grantor, to deliver the deed to the buyer,
2) For the Grantee, to pay grantor agreed upon compensation (money).

6. SALES AND EXCHANGES TO BE REPORTED TO THE IRS

a. Reports are sent to the Internal Revenue Service using Form 1099-S
"Statement for Recipients of Proceeds from Real Estate Transactions"
b. A separate charge cannot be made for the purpose of complying with this
requirement.
7. TERMINATION OF ESCROW
May be terminated by:
a. Full performance and closing;
b. Mutual consent and cancellation;
c. Failure to meet contingencies in the contract;
d. Failure to perform and time limit expires.
8. TENDER: This term refers to the offer by one of the parties to carry-out their
part of the agreement.
9. CLOSING STATEMENTS: Charges and Prorations.
These provide a financial accounting of funds handled by the escrow holder
and are provided to both buyer and seller.

Information to complete Buyers & Seller's Closing Statements

___________________________________________________________________________________________________________________________________________________________________________________________________

Purchase Price: $20,000

Buyer: Gives $2,000 deposit (placed in escrow)
Buyer: Borrows $15,000 from ABC Loan Company
Seller: Carries back 2nd for $3,000
Seller: To pay 6% commission to broker
Seller: To pay-off existing first of $8,000 due XYZ Lending
Buyer/Seller: To split $200 escrow fee

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BUYER'S STATEMENT

Purchase price
Escrow fee (1/2)
Loan from ABC
Buyer's deposit
2nd loan from seller

Debits
What is owed
$20,000
100

Credits
How it was paid
$15,000
2,000
3,000

_____________

Required
Check from buyer

$20,100
____________

These Must Match

$20,100

_____________

Received

$20,000
100
_

$20,100

SELLER'S STATEMENT
Debits
How money disbursed
Purchase price
Escrow fee (1/2)
100
Commission to broker
1,200
Note from buyer for 2nd loan 3,000
Pay-off to XYZ Lending
8,000
Check to seller from Escrow 7,700
These Must Match
$20,000

Credits
Seller to receive
$20,000

_______
$20,000

PRORATIONS

Insurance - Property Taxes - Interest

These items are generally prorated in escrow. When prorated, they will
generally appear as a credit on one party's statement and offset on the other's
statement as a debit.

Escrow Year
365 days divided by 12 months = 30.416 average days per month.
For the purpose of simplifying use of calculations in escrow, escrow companies
created a 30 Day Escrow Month and a 360 Day Escrow Year.

Prorations of Insurance, Property Taxes and Interest on following Pages

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Proration - Insurance
Problem
1. Seller had paid premiums in advance for a 3 year policy.
2. Total charge to seller was $1080. Policy taken out on 1/1/91.
3. Property sold and escrow closed on 5/1/92
.

Close of Escrow
_____________________________*_______________________________________
1/1/91
5/1/92
1/1/94
Used 16 Months

Unused 20 Months
Premium charge: $30 per month
20 Months x $30 = $600

Solution
How Proration Appears on Closing Statements
Seller's Statement
Credit $600

Buyer's Statement
*Debit $600
*Only if Buyer assumes policy

Proration - Property Taxes

See Chapter 6 for information on Fiscal Year, due and delinquent dates, and payment
periods.
Information
1. Taxes for Current Tax Year are $960.
2. Escrow Closes 10/1/92.
Problem 1 - Seller paid current tax year in full.
Problem 2 - Seller paid previous tax year in full.
Problem 3 - Seller had paid the 1st Installment only for current tax year.
Close of Escrow
__________________*____________________________________
7/1/92
10/1/92
6/30/93
Used 3 Months

Unused 9 Months

Problem 1 - Seller paid $960 to pay 1992/93 tax year in full.

Solution: Seller credited for 9 months paid for, and unused. Buyer Debited 9 Months.

Problem 2 - Seller had paid 1991/92 taxes. Has not paid current 1992/93 taxes.
Solution: Seller Debited for 3 Months used but not paid for. Buyer Credited for 3 Months.

Problem 3 - Seller paid $480 to cover 1st Installment of 1992/93 Payment covers
through 12/31/92.
Solution: Seller Credited for extra 3 months paid but not used. Buyer Debited for 3 months.
146

Proration - Interest
I.

Information
A.
B.
C
D.

Loan balance: $24,000.

Interest rate: 10%.
Last payment: Covered payment of interest through October 1st.
Escrow: Closes on October 15th.

Computing Interest Due

Interest, when included in loan payment, is paid in arrears (for previous month).
________________________________*____
9/1
10/1
10/15
Thru September
Principal Paid
Interest Paid

Thru October 15th

Principal Paid
Interest Unpaid

e.g. - When making the above payment, principal paid is applied to reduce loan
balance in the month paid (October), but interest paid is for the previous
month of September.

Problem 1 - Buyer not assuming seller's loan.

Close of Escrow
____________*_____________
Paid through 10/1/92

10/15

Solution:
1. $24,000 x 10% = $2,400 per year
2. $2,400 per year divided by 12 months = $200 per month
3. Seller owes for 1/2 month ($200 x 50% = $100)
4. Seller's statement only, Debit $100.

Problem 2 - Buyer Assuming Seller's Loan

Solution:
1. If buyer assumes seller's loan, seller owes buyer the $100.
This would appear as:
1) A $100 debit to seller; and
2) A $100 credit to buyer.

147