California Real Estate License Express: All-in-One Review and Testing (2020)

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CaliforniaReal EstateLicenseExpressAll-in-One Review and Testing to Pass California’s Real EstateExam2ndEditionDavid CusicStephen MettlingRyan MettlingPerformance Programs Company502 South Fremont Ave., Ste. # 724Tampa, FL, 33606www.performanceprogramscompany.com

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Material in this book is not intended to represent legal advice and should notbe so construed. Readers should consult legal counsel for advice regardingpoints of law.© 2021 by Performance Programs Company502 S. Fremont Ave., Suite #724,Tampa, FL 33606info@performanceprogramscompany.comhttp://www.performanceprogramscompany.com/All rights reserved. No part of this book may be reproduced in any form byany means without the express written consent of the publisher.

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Table of ContentsINTRODUCTION: OVERVIEW & INSTRUCTIONSSECTION I: Real Estate Principles & Law Key Point ReviewRightsInterests & EstatesOwnershipEncumbrances & LiensTransferring & Recording TitleLeasesLand UseLegal DescriptionsContract LawAgencyListing AgreementsBrokerageSale ContractsEconomicsAppraisalFinanceInvestmentTaxationProfessional PracticesClosingsRisk ManagementProperty ManagementSECTION II: CALIFORNIA PRINCIPLES & LAWS KEY POINTREVIEWPart I: Department of Real EstateStructure, Duties and PowersHandling ComplaintsDisciplinary ActionReal Estate Fund & Consumer Recovery AccountPart II: Licensing Regulation

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Licensed Activities and ExemptionsCA License TypesLicensing ProcessReciprocity and Nonresident LicensurePlace of BusinessFictitious NamesLicense RenewalContinuing EducationLicense StatusLicense ViolationsPart III: California Agency and Fiduciary RelationshipsLaw of Agency in CaliforniaDefinitions and Responsibilities of PrincipalsTypes of Agency and Agency RelationshipsCreation and Termination of AgencyResponsibilities of AgentAgency DisclosuresLiabilities of Principal and AgentPart IV: Brokerage ActivitiesBroker-Salesperson RelationshipsCommissions and FeesCompensation AgreementsPlace of BusinessBrokerage SupervisionLicense RetentionBranch Offices and ManagersRecordkeeping RequirementsHandling Trust FundsPart V: Ethics, Fair Housing, and Standards of ConductGeneral Prohibited ConductState and National Fair Housing LawsAdvertising RegulationEssential Brokerage Disclosures and NoticesViolations and PenaltiesPart VI: Escrow and Trust AccountsTrust Account DefinitionsCA Escrow Regulations

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Trust AccountsPart VII: Agreements, Contracts and Title TransfersBroker-Salesperson AgreementsListing AgreementsAdvanced Fee AgreementsContractsTitle TransfersMortgages, Deeds of Trust, NotesLeasesTax AspectsPart VIII: Special TopicsCommunity PropertyLien v Title TheoryEncumbrances and Land Use ControlsSubdivision RegulationsFinancing and Credit LawsReal Estate SpecializationsSECTION III: REAL ESTATE MATH CRAM CARDSBasic MathOwnershipLeasesContracts for SaleAppraisal & ValueFinanceInvestmentTaxationCommissionsClosing Costs, ProrationsInsurance CoverageSECTION IV: GENERAL REAL ESTATE PRACTICE TESTSTest 1: Rights; Interests and Estates; OwnershipTest 2: Encumbrances; Liens; Title Transfer and Recording; LeasesTest 3: Land Use; Legal Descriptions; Contract LawTest 4: Agency; Listing AgreementsTest 5: Brokerage Business; Sale Contracts

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Test 6: Economics; AppraisalTest 7: FinanceTest 8: Investments; Taxation; Professional PracticesTest 9: Closings; Risk Management; Property ManagementTest 10: Real Estate MathSECTION V: CALIFORNIA STATE-LEVEL PRACTICE TESTSTest 11: DRE, Licensing and RegulationTest 12: Agency, Brokerage, and EthicsTest 13: Trust Accounts, Contracts and Transfers, and Special TopicsSECTION VI: CALIFORNIA EXAMINATIONSample Test: California Practice ExamSECTION VII: ANSWER KEY PRACTICE TESTS AND CALIFORNIAPRACTICE EXAMINATIONAPPENDIX: USEFUL WEBSITES

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IntroductionWelcome licensee candidates and future real estate professionals!We know you have worked hard just to get here – you’ve completed ornearly completed your prelicense curricula, and now all you have to do ispass the state license exam. But easier said than done – and that’s where wecome in. We know the state exam can be tough, and very nerve-wracking toprepare for. That’s why we created the California Real Estate LicenseExpress (CA-RELE) the way we did. Since we have been managing realestate schools and developing curriculum for forty years, we know how allthis works – or fails to work. Let us assure you – you made the right decisionbuying this publication to prepare for your California exam. Here’s why.First, CA-RELE is comprehensive in that it contains both key content reviewand testing practice. And the text review is California-specific – not justsimplistic generic content, but terse, relevant and accurate state laws andregulations presented in a well-organized set of ‘key point reviews’ which areideal for pre-test memorization. Finally, our real estate principles andpractices content, as well as our question selection, is further tailored to thestate testing outline promulgated by the California Department of Real Estate(DRE). Therefore, the selected legal points and test questions reflect the topicemphasis of your California license exam.A word about the test questions… CA-RELE’s testing practice sectionconsists of ten general practice tests, three California state law tests, and onestate exam simulation test. The questions are direct, to the point, anddesigned to test your understanding. When you have completed a given test,you can check your answers against the answer key in the appendix. Toenhance your learning and preparations, each question’s answer isaccompanied by a brief explanation, or “rationale” underlying the correctanswer.Your particular study and testing practice strategy using CA-RELE is up toyou. But to fully exploit its comprehensive content coverage, you should tryto review and memorize the key point reviews as much as possible. Then youshould make every effort to take each exam, review your mistakes, and re-read the key point reviews that cover your weaker areas.

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In the end, as you know, it’s all up to you. Unlike other publications, we arenot going to tell you that using this book will guarantee that you pass yourstate exam. It still takes hard work and study to pass. But we have done ourbest here to get you ready. Following that, the most we can do is wish you thebest of success in taking and passing your state exam. So good luck!!About the authorsDavid Cusic, Ph.D., has been a training consultant, author, and PerformancePrograms Company partner for over forty years. As an educator withinternational real estate training experience, Dr. Cusic has been engaged invocation-oriented education since 1966. Specializing in real estate trainingsince 1983, he has developed numerous real estate training programs forcorporate and institutional clients nationwide. Dr. Cusic is co-author of theCompany’s flagship title, Principles of Real Estate Practice by Mettling andCusic, now complemented by over 20 state supplements and 20 exam preptexts.For nearly fifty years, Stephen Mettling has been actively engaged in realestate education. Beginning with Dearborn in 1972, then called Real EstateEducation Company, Mr. Mettling managed the company’s textbook divisionand author acquisitions. Subsequently he built up the company’s real estateschool division which eventually became the country’s largest real estate,insurance and securities school network in the country. In 1978, Mr. Mettlingfounded Performance Programs Company, a custom training programpublishing and development company specializing in commercial, industrial,and corporate real estate. Over time, Performance Programs Companynarrowed its focus to real estate textbook and exam prep publishing.Currently the Company’s texts and prelicense resources are used in hundredsof schools in over 48 states. Mr. Mettling has authored over 100 textbooks,real estate programs and exam prep manuals.Ryan Mettling, partner and currently publisher of Performance Programs, isan accomplished online curriculum designer, author and course developer.His other principal publication is Real Estate Math Express. Mr. Mettlinggraduated Valedictorian from the University of Central Florida’s College ofBusiness Administration.

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Section I: Real Estate Principles & Law Key PointReviewRightsLand / Real Estate / Real PropertyLand:surface, allnaturalthingsattached to it, subsurface, and air above thesurfaceReal estate:land +manmadepermanent attachmentsReal property:real estate + bundle of rightsConstitution guarantees private ownership of real property.Physical Characteristics of Real EstatePhysical characteristicsImmobility; indestructibility; heterogeneity.ImmobilityLand cannot be moved from one site to another; its location is foreverfixedIndestructibilityLand is permanent and cannot be destroyed since by definition itextends below ground and into the skySince land is permanent, it does not depreciateOnly improvements depreciate and are insurable

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Non-homogeneityLand is non-homogeneous; no two parcels of land are exactly thesame since they have a different locationLand versus Real EstateReal Estate as PropertyThe Bundle of Rights:"PUTEE":PossessUseTransferExcludeEncumberLegal Title v. Equitable title

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Legal titleFull legal ownership of property and the bundle of rights as theyapply to it. Contrasts with equitable title.Equitable titleAn interest that gives a lienholder or buyer the right to acquire legaltitle to a property if certain contractual conditions occurProperty characteristics:property is either real or personalproperty is either tangible or intangibleReal Property RightsAirspace= air rightsSurface (of the earth) =surface rightsSubsurface= subsurface or mineral rightsWater rights:Doctrine of Prior AppropriationState controls water usageState grants usage permitsRiparian Rights (Rivers and Streams)applies to rivers and streamsif waterway is navigable: owners own land to water's edgeif waterway is not navigable: owners own land to midpoint ofwaterwayLittoral Rights (Lakes and Seas)applies toseas and lakesabutting property owners own tohigh water markstate owns underlying landMemory Tip:

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R:RiverRiparianL:LakeLittoralReal Property versus Personal PropertyReal Property:landfixturesattachmentsPersonal Property:chattelstrade fixturesemblementsDifferentiation criteria:item is real or personal property depending onwhy, how item is attached to the real estate. Depends on the owners'intention; adaptation; functionality; relationship of parties; contractprovisionsTrade fixtures:personal property items temporarily attached to real estate in order toconduct businessEmblements:plants or crops that are considered personal property despite beingattached to landConversion:real to personal property referred to as severancepersonal to real property referred to as affixingFactory-built housing – mobile homes and manufactured homesUnits are real or personal property:Real property if permanently affixed to ground; otherwise it ispersonal property

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Regulation of real property interestsFederal regulationGrants rights of ownershipControls broad land usage standardsRegulates anti-discrimination lawsExamples: land grants; federal flood zones; fair housing laws;FHA; EPAState regulationGoverns real estate businessSets regional usage standardsExamples: license laws; water rights; development regulationLocal regulationLevies real estate taxesControls specific usageExamples: property assessing; zoning; building permits; taxleviesJudicial regulationApplies case law and common law to disputesContrasts with statutory lawInterests & EstatesInterests and Estates in LandInterests:Possession / PossessoryEstate in landNon-possession / Non-possessoryPrivate: EncumbrancePublic: public interest

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Estates in LandInclude right of possessionLeaseholds = limited durationFreeholds: duration is not limitedFreehold (Own)Fee simpleAbsoluteDefeasibleLife EstatesConventionalLegalLeasehold (Lease)Estate for yearsPeriodicEstate at WillEstate at SufferanceFreeholdsFee simplenot limitedby one's lifetimeabsolute:highestform of ownership interestdefeasible:revertsto previous owner per conditionsLife estatepassesto anotherupon death of a named partyremainder:named partyto receive estatereversion:previous ownerto receive estateConventional life estatelimitedto lifetime of life tenant or named partyordinary:estate passes to remainderman or previous owner when lifetenant diespur autre vie:limited to lifetime of another, passes to remaindermanor previous owner

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Legal life estatecreated by operation of state law as opposed to a property owner’sagreementdesigned to protect family survivorsHomestead:rights to one'sprincipal residencelaws protect homestead from creditorsfamily must occupy the homesteadcannot be conveyed by one spouseendures over life of head of householdinterests extinguished if property destroyedLeaseholdsEstate for yearsspecific,stated duration, per lease; expires at end of termPeriodiclease termrenews automaticallyupon acceptance of rentEstate at Willforindefinite periodsubject to rent payment; cancelable with noticeEstate at Sufferancetenancyagainst landlord's willand without an agreementOwnershipForms of OwnershipTenancy in severaltysoleownership of a freehold estate; passes to heirsTenancy in commonco-tenants individually own undivided interestsany ownership share possible

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no survivorshipcan convey to outside partiesJoint tenancyequal undivided interest jointly ownedsurvivorship(may require express provision)requiresfour unitiesto create: time, title, interest, possessionTenancy by the entiretieshusband and wifeown equal undivided interestNow applies to same-sex couples in some statesCommunity propertyjoint property ownershipby spouses as opposed to separate propertyJoint Tenancy & Four UnitiesUnity of ownershipowners hold single title jointlyEqual ownershipowners always hold equal sharesTransfermay transfer to new owner as a tenancy in common interest withremaining joint tenantsSurvivorshipon death, interests and rights pass to other joint tenantsCreationrequires "four unities,"PITT:1.Possession: acquire same possessory rights2.Interest: acquire equal, undivided interests3.Time: acquire interests at same time4.Title: acquire interests with same deed

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Community PropertySeparateacquiredbefore marriageacquired bygift or inheritanceacquired withseparate-property fundsincomederived fromseparate propertyCommunityall other property earned or acquired during the marriageEstates in TrustTrustorgives title, deed, trust agreement to trusteeTrusteerenders fiduciary duties to trustor and beneficiaryBeneficiaryreceives ownership benefitsLiving / testamentary trust- conveyance of real, personal propertyduring one's lifetimeLand trust- grantor and beneficiary are same party; beneficiary uses,controls property but does not appear on public recordsCondominiumsownership of aunit of airspaceplus anundivided interest inthecommon elementsas tenant in common with other ownersmay be sold, encumbered or foreclosedwithout affecting other unitownerscreation: by developer's declarationindividually taxedmanaged by condo associationowners share common area expensesCooperativesownership ofshares in owning corporationproprietary leasein a unitcorporation has sole, undivided ownership

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owners potentially liable for expenses of entire co-op; creditors mayforeclose on entire propertyTime shareslease or ownership interest in property for periodic use on a scheduledbasislease:tenant leases property per the lease’s schedulefreehold:tenants in common own undivided interests, pay expensesper separate agreementEncumbrances & LiensEncumbrancesNon-possessory interests limiting legal owner’s rightsDo not include possessionTwo types:encumbrances that affect useencumbrances that affect ownership, value, transferEncumbrances affecting use: easements, encroachments, licenses,deed restrictionsEncumbrances affecting ownership, value, transfer: liens, deedconditionsEasementsCharacteristicsRights to use portions of another’s propertyaffirmative easement: allows a usenegative easement: prohibits a useAppurtenantattachesto the estatedominanttenement'sright to useor restrictadjacentservienttenement

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by necessity, tolandlockedownersparty wall easement in a shared structure: to not damage or destroyin Grossdoes not attachto the estatePersonal-- not transferrable, ends upon death of easement holderCommercial-- transferrable, granted to a businessby Prescriptionproperty used without permission; can come to exist regardless ofowner's consentobtainable throughcontinuous, open, adverse useover a periodLicensepersonalright to use a propertydoes not attachnon-transferrablerevocableceases upon death of ownerEncroachmentsUnauthorized intrusions of one owner’s real property onto another’sMay require survey to detectMay become prescriptive easements if not remedied over prescriptionperiodDeed restrictionsConditions, covenants imposed on property by deed or subdivisionplatGoes with the property upon transferEstablished to control quality, standards of a subdivisionApply to land use, type of structure, setbacks, minimum house size,etc.Deed conditionsCreated upon property transferIf violated, ownership may revert to previous owner

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Deed covenantsCreated by mutual agreementEnforceable by injunctionLiensClaims attaching to real and personal property as security for debtRecorded on title effectively reducing equity in the amount of the lienDoes not convey ownership unless a mortgage in a title theory stateLien attaches to the propertyProperty can be encumbered by multiple liensLien terminates upon payment, recording satisfactionLien Types and characteristicsvoluntary / involuntary:example:mortgage lien / tax liengeneral / specific:example:against any & all assets / against car or housesuperior / junior:example:paid before juniors / paid after superiors by date of recordingLien vs. Title Theory Statelien theory state– lender of mortgaged property holds equitable titlerather than legal title; borrower holds legal title.title theory state– lender holds legal title to the mortgaged propertyuntil the mortgagor satisfies the terms and obligations of the loan.Lien PriorityOrder in which liens against a property are satisfiedDetermined by superior v junior class and by date of recordationThe highest priority lien is paid by foreclosure proceeds before any

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other lienSuperior Liens by rank (not by date of recordation; paid beforejunior liens)Real estate tax liensSpecial assessment liensFederal estate tax liensState inheritance tax liensJunior Liens by date of recording (by date of recording)Federal income tax liensJudgment liensMortgage liensVendor's liensMechanic's liens (priority by date work performed)ForeclosureLiquidation or transfer of collateral property by judicial, non-judicial,or strict foreclosureMortgage lien foreclosure:liquidation of collateral property byjudicial,non-judicial, orstrictforeclosureJudicial foreclosure:lawsuit by creditor and court-ordered public sale to enforcelien;deficiency judgments, redemption rightsDeficiency judgmentsjudgment by court on borrower to forfeit other property to payoff anyshortfalls from foreclosureRedemption rightsborrower’s right to reclaim property before or after foreclosure saleNon-judicial foreclosure:"power of sale"granted to lender; no suit;no deficiency

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judgment;no redemptionperiod after saleStrict foreclosure:court orderslegal transfer of title directly to lenderwithout publicsaleDeed in lieu of foreclosure:defaultedborrower deedsproperty to lenderto avoid foreclosureTransferring & Recording TitleLegal v Equitable TitleLegal title:owner enjoys full bundle of rightsEquitable title:party can obtain legal title subject to agreements withcreditorsNoticeNotice:how ownership is evidenced to the publicActual notice:knowledge acquired directlythrough demonstrable evidence, e.g.,presenting or inspecting a deed, visiting a party in possessionConstructive notice:knowledge one could have obtained, as presumed by law; impartedby recording in public records "for all to see"Voluntary / InvoluntaryVoluntary transferdeedwillpublic grant

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Involuntary transferdescent (without will, with heirs)escheat (without will nor heirs)foreclosure (loan default)eminent domain (public good)adverse possession (hostile, open use)Deeds of ConveyanceKey characteristicsgrantor grants deed to granteelegal title transfers upon intentional delivery and grantee’s acceptanceDeed ValidityRequirements:1. grantor2. grantee3. in writing4. legal description5. granting clause6. consideration7. grantor's signature8. acknowledgement9. delivery and acceptanceDeed ClausesPremises:grantingHabendum:type of estateReddendum:restrictionsTenendum:other property includedDeed TypesBargain and sale:"I own but won't defend"

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General warranty:"I own and will defend"Special warranty:"I own and warrant myself only"Quitclaim:"I may or may not own, and won't defend"Special purpose deeds:Used for different purposes, interests conveyed,or by different partiesDeed RestrictionsDeed restrictionsingle-property use restriction as stipulated in a deed; may not bediscriminatoryexamples: minimum area of a residence; setbacks; limits on otherstructures; conducting commercial activitiesDeclaration restrictionuse restriction in multiple-property declarations; enforced by courtinjunctionDeed conditionusage restriction that can trigger repossession by a previous owner ifviolatedTransfer TaxDocumentary stamp tax:tax on conveyance of real property basedon price of property conveyedFacilitates ad valorem assessmentPayment evidenced on deedWillsKey characteristicswill transfers estate to heirs upon deathmaker= owner; devisor or testatorheir = beneficiary or deviseeTypes of wills

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witnessed: in writing and two witnessesholographic: will in testator’s handwritingnuncupative: oral will written by witnesses; generally not valid forproperty transferValidity of willlegal age; mentally competent; entitled “last will & testament;”signed, witnessed, voluntaryTestate / IntestateDies testate with heirs:Order of Title Transferfirst to creditorsthen to homesteadthen toheirs by willDies intestate with heirs:Order of Title Transferfirst to creditorsthen to homesteadthento heirs by laws of descentDies intestate, no heirs:Order of Title Transferfirst to creditorsthento state by escheatInvoluntary title transferAdverse possession“unwanted owner” may claim ownership to a propertymust show “claim of right” as reasonmust be notorious possession (unconcealed)must be hostile (possessor claims ownership)must be continuous for a statutory period of time

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Title RecordsFeaturesInstruments affecting title must be recordedGives public notice of ownership, condition of titleDetermines property marketabilityProtects lienholders; establishes chronology for lien priorityKey Termschain of title – successive property owners from original grant topresentcloud on title – unrecorded claimssuit to quiet title – lawsuit to settle claimsabstract of title: written chronology of recorded owners, transfers,encumbrancesEvidence of Titletitle insurance (best form of evidence)attorney's opinion of abstracttitle certificatesTorrens registrationLeasesKey characteristicslease is both an instrument of conveyance and contract of covenantsbetween tenant and landlordlease conveystemporary, exclusiveuse of premises in exchange forrent and right of reversionTenant rights and obligationsrights: use, possession, quiet enjoyment, profitstenant obligations: pay rent; maintain premises; follow rulesLandlord rights and obligations

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rights: receive rent; repossess upon expiration; monitor tenantcomplianceobligations: property condition, habitability, support servicesEstate TypesGross leaselandlord pays expenses; tenant pays higher rent than netNet leasetenant pays some or all expenses; rent is less than grossPercentage leaselandlord receives rent minimum plus percentage of retailer's salesResidential leasegross lease hybrid; short term; uniform terms reflect landlord-tenantstandardsGround leaselandlord owns and leases ground but does not own improvementsProprietary leasefor cooperative unit owners; indefinite term; assigned to new unitowner on saleLeasing of rightsleasehold transfer of rights for limited use; examples: air, mineral,water rightsLease TerminationCausesdefaultnoticeproperty destructiondeathterm expiration

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voluntary agreementcondemnationabandonment under certain conditionsUniform Residential Landlord and Tenant ActPurposesbalance landlord and tenant rightsstandardize leaseshave uniform eviction proceduresprotect tenantsserve as model for state legislationLeases:clear lease termsfair market rentcannot waive rightsDeposits:limits on amountstenant's right to interestrules and deadlines for returningLandlord Obligations:bargain in good faithprovide maintenance and repairscomply with building codesprovide safety and accessprocedure for delivery of noticesTenant Obligations:maintain conditionabide by rules and regulationsno damage or abuseabide by approved usesno disturbance of other tenants

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Land UsePlanning and Zoning DefinitionsBuilding code:A standard of construction of an improved propertyestablished by local government officialsCertificate of occupancy:A document confirming that a newly constructedor renovated property has fully complied with all building codes and isready for occupancyConcurrency:A planning policy that requires developers to correct foreseennegative impacts of a development during the construction period of theproject itself rather than afterwardsCondemnation:1. A decree that a parcel of private property is to be takenfor public use under the power of eminent domain. 2. A governmentorder that a is no longer fit for use and must be demolished.Deed restriction:A provision in a deed that limits or places rules on how thedeeded property may be used or improvedEminent domain:A power of a government entity to force the sale ofprivate property for subsequent public useLand use control:Regulation of how individual owners use property in amunicipality or planning district. Control patterns are in accordance witha master planMaster plan:An amalgamated land use plan for a municipality, county, orregion which incorporates community opinion, the results of intensiveresearch, and the various land use guidelines and regulations of the state.Acts as a blueprint for subsequent zoning ordinances and rulingsNon-conforming use:A legal or illegal land use that is not consistent withthe current zoning ordinancePolice power:A government's legal authority to create, regulate, tax, and

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