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Reviewing for the State Licensing Exam |
| Real Estate License Exam - Review Material | |
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This material assumes you've finished an Illinois real estate prelicense course:
General Concepts: Types of real property include residential, commercial, industrial, agricultural, special purpose. The most critical economic characteristic of land is area preference: location, location, location. Physical characteristics are immobility, indestructibility, and uniqueness. Real property includes air rights and mineral rights and the bundle of legal rights: possession, control, enjoyment, exclusion and right to sell.
What distinguishes personal property (or chattels) from fixtures is that personal property is moveable and by removing it the property would not be damaged. A fixture is personal property that has become part of the real estate by attachment, like a light fixture. Tests of a fixture include intent and method of attachment.
When you own a home, mortgage interest and property taxes are deductible expenses; principal paid, insurance premiums and private mortgage insurance are not deductible items.
Agency (working for a client): To establish an agency relationship you need to have competent parties, a lawful purpose, and agreement between the parties. It does not need to be based on compensation. The five duties under the common law of agency are: care, obedience, accounting, loyalty, and disclosure. A definite termination date must be included in all written agency agreements. Real estate agents are typically “special agents.” The selling agent represents the buyer and the listing agent represents the seller. Dual agency is acting as an agent for both the seller and buyer in the same transaction. A seller would be a principal. The agency relationship is called a fiduciary relationship. An agent is bound by law to disclose known latent material defects. Always remember a broker or agent cannot give legal advice.
An agent working under a broker has an agency relationship with his broker. Usually agents work as independent contractors which means the broker will not withhold taxes or social security. All independent contractors must have a signed agreement with the broker. An agent in the State of Illinois can have only one sponsoring broker at any one time. All commissions are only paid to the broker who then pays the agents. The broker must compensate a licensed personal assistant hired by an agent. Referral fees and commission splits are always paid broker-to-broker and then to their respective salespeople. A broker can never pay another broker’s agent nor may agents pay anyone, licensed or not, a commission. Birddog fees are illegal (paying for referrals or prospecting).
Ministerial Acts can be performed without creating an agency: things like answering questions without giving advice. As soon as an agent begins to show homes, talk about options in housing, inquire about needs and offer to help, the agent has moved beyond “ministerial.” Merely setting an appointment to view a home for a call-in is ministerial.
It is true that a salesperson is an agent of his broker. When a listing agreement is signed with the broker, the agent becomes a “designated agent” of the seller and has a fiduciary responsibility to the seller. The same is true with buyers with whom the agent may be working. An agency relationship is established by either written or implied agreement between the two parties. An agent does not owe fiduciary responsibility to the general public, just to his/her client.
License Law Miscellaneous: In Illinois the Real Estate Commission operates under the Illinois Department of Financial and Professional Regulation (IDFPR). The Commission administers the Illinois Real Estate Law which was written to help insure the “competency of persons engaged in the real estate business…” and “…to protect the public.”
In Illinois all people engaged in the rental, sale, lease, negotiation, trade of real estate for another for compensation need to be licensed with the exception of a RESIDENT PROPERTY MANAGER.
There is a leasing agent license for those people engaged ONLY in renting residential property. All licensed agents may rent property, but those licensed just as leasing agents may not sell property. It’s a 15-hour course.
Illinois does have a reciprocal licensing arrangement with many States. That allows for non-resident real estate brokers to obtain a license in Illinois by completing the Illinois law course of study and passing the Illinois specific part of the State examination, providing that State will do the same for our brokers (hence the term “reciprocal”).
A 45-hour course of study and a passing grade on the final exam is required before the State of Illinois licensing exam. After successful completion of the pre-license course, you will receive a Uniform Transcript which allows access to the State exam. That transcript is good for up to three years. After you pass the State exam you have one year within which to find a broker and become sponsored (in other words, complete the licensing process). The sponsor card (also called a 45-day permit) issued by your broker will be your first evidence that you’ve been licensed. A wall certificate and pocket card from the State will be received within a few weeks. 120 hours of education are required to sit for the broker examination. If a license is expired for more than two years the entire course must be taken again. Brokers and salespeople renew in alternating years: Brokers during even numbered years, Salespeople are odd. Salespeople need 12 hours of continuing education before each renewal. Brokers must complete the same 12 hours, plus an additional 6 hours of Broker Management.
The recovery fund exists to pay for public losses caused by real estate licensees. The maximum recovery for any one illegal act is $10,000 and the maximum payout for any one licensee is $50,000 covering repeated acts. The agent found guilty will have a suspended or revoked license and can petition for reinstatement only after paying back the recovery fund with interest.
Commissions are always negotiable (Antitrust Act). They must be set by the consumer and the broker.
If an agent is terminated the broker must immediately sign the license to invalidate it and send a photocopy to the department within 48 hours. The agent gets the original invalidated license. If the agent then elects to work with a new broker, a new 45-day permit would be filled out and a new license issued with the new sponsoring broker.
Listing agreements can be exclusive right to sell, exclusive agency, open, or net. Net is not commonly used in Illinois due to the potential for unethical practice (sell the property for a set amount and keep the difference as commission). Exclusive Right to Sell means a commission is due the broker no matter who sells the property, Exclusive Agency means you get commission only if a real estate company sells not if the owner sells. Open is really where several companies have the same listings and only the one who sells it gets paid: i.e. when a for- sale-by-owner (FSBO) sends a note to an office saying, "I’ll pay a commission if you can sell this house." Just like all agency agreements there must be a specific expiration date and there cannot be an automatic extension. An agent is allowed to sell his own home, for sale by owner, but must notify the public that the owner is licensed. The same disclosure is required anytime a licensee enters into a real estate to sell or buy a property. Blind ads on listed homes are illegal; they must show the broker name.
Listing agreements create an agency relationship. They must specify the expiration date, cannot contain an automatic renewal, must be signed, have the price and method of paying commission. They need to specify compensation, because they are, in essence, employment agreements. When working with a client an agent owe a fiduciary responsibility to the client. It is very important to respect agency relationships between all agents and their clients. Contacting another agent’s client directly can be cause for disciplinary action.
All brokers must maintain an escrow account for “other peoples’ money.” The escrow account must be separate from the broker’s operating account and cannot earn interest for the broker. Money to be deposited in the escrow account would be items like earnest money, possession escrow, etc. Commingling is mixing company or broker funds with the funds of others in the escrow account. It is illegal. Conversion is taking a loan from your escrow account. It is illegal. A landlord who manages a building of 25 units or more must pay interest on security deposits.
Interests in Real Estate: Government has rights or powers like Eminent Domain (the right to acquire private property through the process of condemnation – must be done for the public good and with just compensation) and Police Powers (zoning, etc.). Zoning can place restrictions on property use. So can Deed Restrictions, created by the individual seller in his deed of sale. Deed restrictions run with the land (meaning when the property is sold to someone else, the deed restrictions remain on the property). Restrictive covenants are deed restrictions and they may be more severe than zoning restrictions. An example of zoning law would be a residential property could not be used for manufacturing. An example of a deed restriction might be that the owner could not park a recreational vehicle in the driveway or couldn’t fence a side yard.
Escheat is not a government power, it is a right. It is simply that if no owner can be found for a property and it has not been left to someone by a will, it will become government property. It prevents abandoned, ownerless pieces of property. In Illinois, unlike some other states, the property will escheat to the county and not the state.
Estates (rights) can be freehold (ownership) or leasehold (rental). Fee simple absolute is absolute ownership and considered to be the highest form of ownership. Fee simple defeasible is ownership with a condition (perhaps that the property never be used as a real estate office). A life estate, which is a freehold estate, ends with the death of the grantor or grantee depending on how granted or, in the case of a “por autre vie,” could be for the life of another person and would end when that person dies. If someone sold their life estate, whoever purchased it would lose it on someone’s death. A leasehold estate is less than a freehold estate. Leaseholds can be tenancy for years (fixed beginning and end…a specific duration of time), periodic tenancy (like month to month), tenancy at will (your brother rents a room), and tenancy at sufferance. An estate at sufferance is not a legal estate; it is when the tenant holds over without permission. Used mostly in residential leases, a gross lease is where the tenant pays a set amount covering everything. Common in commercial leases, a net lease, could be triple net, is where the tenant is charged in addition to the rent an amount to cover some other cost such as insurance, property taxes, or maintenance. A percentage lease is where the landlord will take a percentage amount over a specified annual sales figure in addition to the monthly rent. This is most often used in shopping center or mall leases. It’s a little like a commission over a quota. A tenancy at sufferance is a hostile occupancy and therefore not a legal occupancy. A tenant who is in violation of his/her lease should be given a five day notice to demand payment before eviction can begin.
An encumbrance is a claim or liability that is attached to a property. Encumbrances like liens on property would be revealed through a title search. An encroachment is the unauthorized use of another’s property and would be revealed through a survey. An encroachment is an encumbrance.
Both adverse possession and easement by prescription are hostile open and continuous use of another’s property for a period of years. In Illinois it’s 20 years.
Riparian rights are rights to the use of streams or rivers.
The homestead, which is given to homeowners in Illinois, protects up to $15,000 for an individual homeowner ($30,000 for a couple) against claims other than in a foreclosure. Do not confuse this with the Illinois homeowner’s exemption that protects homeowners against an increase in property assessments up to $5,000. There is also a tax exemption for seniors.
Forms of ownership – holding title: Owning property alone, not in co-ownership, is called Tenancy in Severalty: “sever” ownership from all others. Holding title in co-ownership, in Illinois, can take three forms: Tenants in Common is where each tenant holds an undivided fractional interest. It may be sold and it may be willed to another. Each tenant has the right to possession of the whole property; it is the ownership that is divided, not the property. Joint tenancy is when all the tenants own the property as a whole, together. Joint tenancy must be created by one deed. A joint tenant may sell his interest in the property but the new owner would not be a joint tenant. Joint tenancy is characterized by right of survivorship. If one tenant dies, the others get his/her share, it can’t pass to the heirs by will. Tenancy by the Entirety must be husband and wife and they are considered as one-person owners.
Illinois is not a community property state. Community Property consists of all property, real or personal, that is acquired by either party during the marriage. It excludes gifts and inherited property.
In a condominium project, you own the air space between the walls of your unit and have an interest in the common elements. Most of the common elements are things like the hallways, parking lots, swimming pools, etc. A limited common element would be something like a balcony or a storage bin. The homeowners’ association fees are charged to all owners based on the percentage of ownership. The rules, regulations, and rights of a condo owner are covered in the declaration.
Legal Description: Three basic methods are used to describe real estate: Metes and Bounds, Rectangular Survey, Lot and Block (plat book). In plat book all you need is the book number, page, and lot and block number and you can find the information. In a survey, all the dimensions are drawn on a page. In a metes and bounds, the description is written out from a point of beginning going all the way around the property by feet and inches (using natural and artificial landmarks) and ending back at the point of beginning.
In the government rectangular survey system, the main dividing line running east and west is the baseline and the major dividing lines going north and south called principal meridians, in Illinois it’s the 3rd and 4th Principal Meridians (mostly the 3rd). A township (6 miles by six miles) is made up of 36 sections and each section is 1 mile by 1 mile consisting of 640 acres. Township lines run east and west and range lines run north and south. If you were trying to find the size of a parcel of property from a legal description you would read the description backwards and simply eliminate areas. Sections are numbered starting in the upper right hand corner of the township and going back and forth across the township until number 36 is reached in the lower right hand corner.
Taxes and Liens: A lien is a charge or claim against property made to enforce payment of money owed. A voluntary lien would be like a mortgage or credit line. An involuntary would be a judgment or lien for unpaid taxes. When a home is sold either voluntarily or through a foreclosure, the recorded liens are paid according to the order in which they were recorded. Priority of a lien can be changed by a subordination agreement between lien holders. All liens are encumbrances, but not all encumbrances are liens. A recorded easement, for instance is an encumbrance. A title policy would show recorded encumbrances. An encroachment is when the property lines have been violated by property belonging to another. A survey would show encroachments. Property taxes can become liens, if not paid in a timely manner.
Property taxes are calculated based upon the equalized assessed value of the property. Special assessments are taxes levied on owners to fund public improvements. A mechanics lien is when someone who has done work on a property does not get paid and files a claim within four months of the works completion. The date of the mechanics lien would be from the date the work started or the contract was signed. A lis pendens is a special notice that there is some litigation pending involving a particular property; sort of a “we may suit you” notice.
Contracts: The Statute of Frauds says that in order for a contract to be enforceable in court, it must be in writing. The exception is a lease for one year or less.
Contracts to purchase need to have buyer and seller name, property address, consideration, responsible parties, and signatures. A contract does not have to be notarized. Copies of all signed documents must be given to all parties within 24 hours of signature. If a listing office receives earnest money with an offer, it must be deposited in the broker’s escrow account no later that the next business day after the contract has been accepted and signed by all parties. If a party to the contract defaults, the possible remedy is a suit for specific performance. A buyer’s earnest money, occasionally, might be forfeited as “liquidated damages.”
Options between seller and potential buyer: seller (optioner) gets to keep the option money and buyer (optionee) can force the optioner to sell.
In a land contract, or articles of agreement for deed, the seller keeps title until the last payment is made. The buyer gets equitable title. This is like owner financing.
Transfer of Title: Title to real property is transferred by deed. Normally, along with the real property, is a collection of personal property like refrigerator, stove, etc. which is transferred by bill of sale. An acknowledgment is a signature. (The term “acknowledged” is also used to describe s signed document that has been notarized by a Notary Public.) To be valid a deed must have the description of the property, names of the parties, signature of the grantor, and be delivered and accepted. It does not have to be notarized or recorded to be valid. Recording is necessary to protect the owner, by giving constructive notice to other parties that the property is owned. In order to be recorded it must be signed by the grantor. The grantor is the one who owns the property when the deed is prepared. The grantor conveys and the grantee receives. Remember for your testing sessions that Illinois is considered an Intermediate Theory State when it comes to who holds title on a mortgaged property. The most protection is offered by the general warranty deed in which the owner says he will defend the deed forever. The least protection is provided by the Quit Claim deed through which the grantor deeds his interest, if any, in the property: I could quit claim the Statue of Liberty or Brooklyn Bridge, but clearly title would not pass because obviously I don’t have any ownership interest.
Illinois law requires all sellers to complete a Residential Real Property Disclosure when involved in the sale of a one to four unit building. In it the Seller is required to disclose all known material defects.
In a real estate trust, legal title is held by the Trustee (maybe a bank) and the Trustor (person who puts the property into trust) is commonly named as beneficiary. The person with Power of Direction controls what the Trustee does. That person may be the beneficiary or some other entity. A deed in trust conveys to a trust. A trustee’s deed conveys out of a trust.
In the case where an owner died intestate and no heirs could be found, the property would escheat to the county. If there is no will (intestate succession) distribution of the property would follow the State law of descent and distribution: married ½ to spouse, ½ to children. Unmarried: 1/3 to each parent and 1/3 to the siblings. If either parent is dead the other gets 2/3rds.
A title insurance policy usually required to close a purchase protects the new owner against defects in title and is paid at the time of closing. It is a one-time charge.
Financing: Debt Service is principal and interest. With a mortgage, the primary evidence of a debt is called the promissory note. In a mortgage document, the clause that could call the entire amount of the loan to be due and payable immediately is called the acceleration clause. The defeasance clause is requires the lender to issue a satisfaction of mortgage or a release of lien when the loan has been paid in full. If a mortgage is foreclosed upon there is a right of redemption only before the final sale. In Illinois that is by statute and is called a “statutory right of redemption,” some states have an additional right of redemption after the sale, but not Illinois. Unless otherwise stated in the mortgage documents, interest is paid in arrears. In other words you close the transaction, move in, and make your first payment after you’ve been in the home for a month.
The primary mortgage market can be considered “street level,” or where you might go to apply for a loan: banks, mortgage companies, credit unions, etc. FNMA (Fannie Mae), GNMA (Ginnie Mae), and FHLMC (Freddie Mac) are secondary mortgage market organizations which buy existing loans from approved lenders.
Discount points are always calculated on the mortgage amount: 1 point equals 1% of the mortgage amount. A loan origination fee of 1 point, just like other points, equals 1% of the mortgage amount. The primary reason points are used is to increase the yield on a loan, but paying points can also allow the borrower to reduce the monthly payment by lowering the loan interest rate: points are prepaid interest. When a loan in return for a mortgage is given, the lender must provide a full disclosure of items related to the loan, this would include interest rate, points, closing fees, etc. but not such things as survey or attorneys fees. As required in the Federal Truth in Lending (regulation Z). The disclosure must include the APR (annual percentage rate of the loan when taking into consideration all the fees involved). It does not apply to commercial property.
The Department of Veterans Affairs (VA) type mortgage is where the VA guarantees the loan. The VA does not loan the money. The borrower must intend to occupy the property. There is no pmi or MIP on a VA loan, but the borrower must be an eligible veteran. An FHA type mortgage is where the FHA insures the loan and there is an insurance charge called MIP. The FHA does not loan the money.
Property Management: A property manager, working for an owner, would have a property management agreement under which he/she would agree to handle the rents, monthly statements, investigate prospective tenants, handle the maintenance, etc. The management agreement would cover items relating the property, but not include items like handling investing or tax returns for the owner.
Appraisal: Of the three approaches to estimate of value, cost, income, and sales comparison, the sales comparison provides the best estimate of market value in residential appraisal on all but brand new construction. It uses recent sales. New construction many times is appraised by the cost approach. Market value is defined as the price a ready willing and able buyer will give a ready willing and able seller, when neither is under pressure to act and they don’t know each other. It is the highest (most probable) value at which the home will sell. The amount the home originally sold for has very little if any relation to market value today.
The income approach is normally used when the appraiser is trying to determine the value of income producing properties like apartment buildings or four flats. The income approach will use the cap rate (IRV) and the gross rent multiplier. The gross rent multiplier is determined by dividing the gross rents on the building into the sales price.
The cost approach is how much it would cost to build, new, adjusted for depreciation and usually sets the upper limit in a value range. Cost approach is used for special use buildings: church, factory, school, etc.
Of the three sources of depreciation, external (or economic), physical (like a bad roof), and functional (like a four bedroom with one bath), economic is the one that is most often incurable. It lies outside the property and occurs when something like a garbage dump is started in the neighborhood.
Market value less liens is called equity.
Land Use Controls: Non-conforming use is when a property was used for a purpose before the current zoning laws took effect (Grandfathered). A variance is when an owner is given a special permission to use a property in a way that does not conform to current laws; it is a special exception to the zoning. Zoning laws are enacted to protect the general public and take into account, use, lot size, structure type, density, etc. they would not consider things like the cost of the building or how much the owner was being paid for it. Building codes, on the other hand, address construction standards and have certain requirements that homes and other structures must conform to certain minimums.
In Illinois, anytime you subdivide a property into parcels of less than five acres they come under the jurisdiction of the Plat Act.
Fair Housing: The Federal Fair Housing Act (1988) prohibits discrimination against any person because of Race, Color, Religion, Sex, Handicap, Familial Status, or National Origin. The Illinois Human Rights Act adds Age and Marital Status to the list. Basically says you cannot discriminate against anyone. It does not preclude turning someone down on the basis of a poor credit history. It doesn’t cover commercial property and doesn’t apply to single family, one to four unit owner occupied properties as long as a real estate broker is not used and there is no discriminatory advertising. Though not specifically related to the Federal Fair Housing laws, know that an agent working for a seller still has to disclose any known but hidden material defects to his client’s home. Federal Law, however, prohibits that an agent disclose that a homes occupants have HIV or Aids. In fact, any other medical conditions are not required to be disclosed. But law specifically prohibits disclosure of Aids.
Environmental Issues: Asbestos (usually from fibers floating in air), Lead Based Paint (usually from being eaten by children), Radon (a gas), UFFI (another insulation material) have been identified as health hazards. It has not been shown that Electromagnetic Fields are a health hazard, but high power lines are not well accepted by the public. Asbestos can cause a special problem, because attempting to remove it can make it worse (it is easily friable which means as it ages it easily breaks down and can become airborne particles). Floor tiles sometimes are better off if sealed in and left (encapsulated).
Closing the Transaction: At a closing some costs are prorated. That means that some of the cost should be paid by the buyer and some by the seller, for instance real estate taxes for the year would be partly the responsibility of the seller, for the time he lived there, and partly the buyer for the time he will live there. Other prorated items could be insurance, if the buyer took over the sellers insurance policy, prepaid rent or association fees, etc. Items that would be paid by one side or the other include things like preparing the deed (seller), real estate commission (usually the seller), survey (the seller), release of a property lien (seller), recording a new mortgage (buyer), etc. A closing statement is prepared and amounts of money are credited to either the buyer or the seller in order to account for all the monies owed and paid. The purchase price would be credited to the seller, the earnest money already paid would be credited to the buyer, the amount of the new mortgage would be credited to the buyer, any bills that the seller still owes that the buyer will be paying (like unpaid taxes) would be credited to the buyer.
Prorating is simply money divided by time. For example, if you were going to prorate the annual taxes on a piece of property, you would simply divide the annual tax by 365 to come up with a per diem cost and then charge the seller for however many days he was in possession of the property. The same process could be used to prorate a rent amount if, for instance, a renter was going to stay over a few days and the landlord agreed to prorate. Simply take the monthly rent, divide by 30 and calculate.
In Illinois the seller pays a transfer tax in the form of revenue stamps at the rate of .50 cents per $500 to the state and .25 cents per $500 to the county (we usually calculate $1.50 per thousand). If there is an assumed mortgage, the amount of the assumed mortgage is deducted from the sale price and the stamps are calculated on the balance or the amount over the assumed amount. Also if there was a major item of personal property included in the sale, no transfer tax would be paid on that amount.
Good luck.
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