California Real Estate Broker Exam — All Questions

A California broker represents both the buyer and the seller in one transaction. Under Civil Code section 2079.16 this is:

• a.Legal in commercial transactions and prohibited in residential transactions of any size
• b.Legal, but only with the knowledge and consent of both the seller and the buyer✓
• c.Prohibited outright, because the broker cannot owe undivided loyalty to opposing parties
• d.Legal without disclosure so long as the broker's compensation comes from one side only

The statutory disclosure form states that a real estate agent can legally be the agent of both the seller and the buyer in a transaction, but only with the knowledge and consent of both. California does not draw a residential-commercial line for the legality of dual agency itself. It is not prohibited outright; instead it is regulated through disclosure, confirmation and the confidentiality limits of section 2079.21. And Business and Professions Code section 10176(d) makes acting for more than one party without the knowledge or consent of all a ground for discipline, so proceeding silently is exactly what the law forbids.

Civil Code section 1624(a)(4) requires a writing for an agreement employing a broker to sell real estate for compensation. The practical consequence for a California broker is that:

• a.An oral listing becomes enforceable as soon as escrow opens on an accepted offer
• b.An oral listing is enforceable if two disinterested witnesses heard the seller make the promise
• c.An oral listing binds the seller once the broker has advertised the property to the public
• d.An oral listing generally cannot be enforced by the broker to collect the promised commission✓

The statute of frauds in Civil Code section 1624(a)(4) makes an agreement employing a broker to purchase or sell real estate for compensation invalid unless it, or a note or memorandum of it, is in writing and signed by the party to be charged. A broker who takes an oral listing therefore has no enforceable claim for the commission. Witnesses do not substitute for the signed writing the statute demands. Advertising is the broker's own performance and does not create the missing signature. And the opening of escrow is a step in the sale, not a cure for a commission agreement that was never reduced to writing.

Under Business and Professions Code section 10176(f), a California broker risks discipline for claiming a commission under an exclusive agreement that:

• a.Does not contain a definite, specified date of final and complete termination✓
• b.Provides for a commission rate higher than the local board's published schedule
• c.Allows the seller to cancel the listing at any time on written notice to the broker
• d.Names more than one cooperating broker as an authorized subagent of the seller

Section 10176(f) lists as a ground for discipline the claiming, demanding or receiving of a fee under any exclusive agreement authorizing the licensee to perform acts requiring a license where that agreement does not contain a definite, specified date of final and complete termination. There is no lawful board commission schedule to exceed; section 10147.5 requires the printed notice that compensation is not fixed by law and is negotiable. A cancellation right is a negotiated term, not a violation. And authorizing cooperating brokers is ordinary practice under a multiple listing arrangement.

Since Civil Code section 1670.50 took effect on 1 January 2025, a California buyer's agent must execute a written buyer-broker representation agreement with the buyer:

• a.At any time before the broker submits a claim for compensation to the listing broker
• b.Within three business days after the buyer's offer has been accepted by the seller
• c.Before the close of escrow, provided the buyer signs an acknowledgment at closing
• d.As soon as practicable, and no later than the execution of the buyer's offer to purchase✓

Civil Code section 1670.50(a), added by AB 2992, requires the buyer-broker representation agreement to be executed between the buyer's agent and the buyer as soon as practicable but no later than the execution of the buyer's offer to purchase real property. Commissioner's Regulation 2906.2 adds a rebuttable presumption that it is practicable to obtain the signed agreement before the agent shows the buyer a property in person or virtually. Waiting until after acceptance, until closing, or until a compensation claim is made all fall outside the statutory deadline, and an agreement made in violation of the section's limits is void and unenforceable.

Under Civil Code section 1670.50, a buyer-broker representation agreement with an individual buyer may not last longer than:

• a.Six months from the date the buyer first views a property with the agent in person
• b.Twelve months from the date the agreement was made, unless the parties agree otherwise
• c.Three months from the date the agreement was made, and it cannot renew automatically✓
• d.Ninety days from the close of escrow on the buyer's most recent completed purchase

Section 1670.50(d)(1) limits a buyer-broker representation agreement to three months from the date it was made, and paragraph (2) forbids automatic renewal and requires any renewal to be in writing, dated and signed by all parties, with the renewal itself limited to three months. Regulation 2906.1 defines the three months as 90 calendar days beginning the day after the last party signs. The three-month cap does not apply where the buyer is a corporation, limited liability company or partnership. An agreement that violates these limits is void and unenforceable under paragraph (3).

Which listing gives the seller the right to sell the property personally without owing a commission, while still obligating the seller to pay if any broker produces the buyer?

• a.An exclusive agency listing✓
• b.An exclusive right to sell listing
• c.A net listing with an open term
• d.An option listing with a fixed price

Under an exclusive agency listing the seller appoints one broker as the exclusive agent but reserves the right to sell to a buyer the seller finds without paying a commission; if any broker produces the buyer, the listing broker is paid. An exclusive right to sell listing entitles the broker to a commission no matter who produces the buyer, including the seller. A net listing fixes the seller's net proceeds and lets the broker keep the excess, which California permits only with strict disclosure of the amount of the broker's profit. An option listing combines a listing with the broker's own right to buy and triggers the disclosure duty in section 10176(h).

A California listing broker learns that a prospective buyer would pay far more than the offer already on the table. The broker's duty to the seller requires the broker to:

• a.Disclose it only if the buyer who made the pending offer consents to the disclosure
• b.Withhold it until the pending offer is either accepted or rejected by the seller
• c.Communicate that material information to the seller, because it affects the seller's decision✓
• d.Present it to the escrow holder so the information reaches both parties at the same time

The agent's fiduciary duty of full disclosure requires the broker to give the principal every material fact bearing on the transaction, and information about what the market will pay is squarely within that duty. Delaying the news until the pending offer is resolved substitutes the broker's judgment for the seller's on a matter the seller is entitled to decide. The other buyer's consent is irrelevant, since the duty is owed to the seller, not to a prospective buyer. And routing information through escrow is not a substitute for reporting to the principal, because the escrow holder is a neutral depository rather than the seller's agent.

Under Business and Professions Code section 10176(g), a broker who takes an undisclosed profit on a client's transaction has committed:

• a.A civil matter only, outside the Commissioner's disciplinary jurisdiction
• b.A permissible markup, provided the client received the price stated in the listing
• c.A violation of the Subdivided Lands Law rather than of the Real Estate Law
• d.The taking of a secret profit, a ground for suspension or revocation of the license✓

Section 10176(g) makes it a ground for discipline for a licensee to claim or take any secret or undisclosed amount of compensation, commission or profit, or to fail to reveal the full amount of the licensee's compensation to the buyer or seller before or at the time the parties reach agreement. Getting the listed price does not cure the concealment, because the client is entitled to know what the agent is making. The Subdivided Lands Law governs the sale of subdivision interests and is a different statute. And section 10176 is precisely a grant of disciplinary jurisdiction, so the conduct is not a private matter alone.

Civil Code section 2079.2 measures a California broker's standard of care by:

• a.The degree of care an experienced structural engineer would exercise in the same circumstances
• b.The degree of care a reasonably prudent real estate licensee would exercise on the facts✓
• c.The standards published by the trade association to which the broker's office belongs
• d.The subjective good faith of the individual broker, judged by the broker's own experience

Section 2079.2 fixes the standard as the degree of care that a reasonably prudent real estate licensee would exercise, measured by the degree of knowledge through education, experience and examination required to obtain a California real estate license. That standard is objective and it is a licensee standard. A broker is not held to an engineer's expertise, which is why the statute contemplates recommending appropriate professionals. Trade association standards may bind members privately but do not set the statutory duty. And a purely subjective good-faith test would defeat the objective measure the statute adopts.

A broker holding a client's earnest money deposit owes the client which fiduciary duty most directly?

• a.The duty of obedience to the principal's lawful instructions about marketing
• b.The duty to account for all money and property received on the principal's behalf✓
• c.The duty of confidentiality about the principal's motivation for selling
• d.The duty of loyalty to prefer the principal's interest over the agent's own

The duty to account is the fiduciary obligation to keep and render an accurate accounting of all money and property entrusted to the agent, and it is the duty the trust fund rules in Business and Professions Code section 10145 and the Commissioner's Regulations put into operational form. Obedience concerns following lawful instructions about how the work is done. Confidentiality protects information the principal shares. Loyalty forbids self-dealing. All four are genuine fiduciary duties, but handling client money is the accounting duty, and a failure there is the most common route to trust fund discipline.

A seller instructs the listing broker not to show the property to buyers of a particular national origin. The broker must:

• a.Follow the instruction and note the seller's reason in the transaction file for the record
• b.Follow the instruction, because the duty of obedience is owed to the principal without exception
• c.Refuse the instruction, because the duty of obedience covers lawful ones only✓
• d.Withdraw from the listing without explanation and take no other step in the matter

The fiduciary duty of obedience covers lawful instructions only. An instruction to screen buyers by national origin would require the broker to violate the Fair Employment and Housing Act and the Unruh Civil Rights Act, and following it exposes the broker to discipline under Business and Professions Code section 10177 as well as civil liability. Documenting the reason in the file does not make compliance lawful; it creates evidence of a knowing violation. Simply walking away silently is also inadequate, because the broker should tell the seller the instruction cannot be followed and, if the seller persists, terminate the relationship.

Under Business and Professions Code section 10176(h), a broker who holds an option to purchase in a listing agreement must, before or when exercising the option:

• a.Give the client fifteen days' advance notice of the intent to exercise the option
• b.Deposit the option consideration with a neutral escrow selected by the client
• c.Obtain an independent appraisal from a state-certified residential appraiser
• d.Reveal in writing the full amount of the profit and obtain written consent✓

Section 10176(h) allows a licensee to hold an option to purchase inside an agreement authorizing the licensee to sell, buy or exchange for compensation only if, before or coincident with electing to exercise the option, the licensee reveals in writing to the buyer or seller the full amount of the licensee's profit and obtains that party's written consent approving the amount. The statute demands disclosure and consent about profit, not an escrow deposit. It requires no independent appraisal. And it sets no fixed advance notice period; the trigger is the election to exercise.

Under Civil Code section 2079.14 as amended by AB 2992, the seller's agent must provide the statutory agency disclosure form to the seller:

• a.Before entering into the listing agreement with the seller✓
• b.Within three days after the listing agreement has been signed
• c.At the time the first written offer is presented to the seller
• d.Before the seller signs the escrow instructions at closing

Section 2079.14(a)(1) requires the seller's agent to provide the disclosure form to the seller before entering into the listing agreement, so the seller understands the representation choice before committing to it. Delivery after signing defeats that purpose. Presentation of the first offer is far too late, since by then the agency has already been formed and the seller has relied on it. And escrow instructions are signed after the contract exists, which is later still. Section 2079.14(b) also requires the agent to obtain a signed acknowledgment of receipt.

A California buyer writes an offer without the agent's help and hands it to the buyer's agent. If the agency disclosure form has not yet been given, section 2079.14 requires the buyer's agent to present it:

• a.No later than five calendar days before the scheduled close of escrow
• b.No later than three business days after the seller accepts the offer to purchase
• c.No later than the next business day after receiving the offer from the buyer✓
• d.No later than the date the buyer's loan application is submitted to the lender

Section 2079.14(a)(2) requires the buyer's agent to provide the disclosure form as soon as practicable before execution of a buyer-broker representation agreement and execution of the buyer's offer, and adds that if the offer to purchase was not prepared by the buyer's agent, the agent must present the form to the buyer not later than the next business day after receiving the offer from the buyer. The other periods belong to different statutes: three and five day windows appear in the Transfer Disclosure Statement termination right, and loan application timing drives the mortgage loan disclosure statement in Business and Professions Code section 10240.

Civil Code section 2079.17 requires the agency relationship to be confirmed:

• a.In the multiple listing service data sheet published to cooperating brokers
• b.By the escrow holder in the closing statement delivered to both parties after recording
• c.Orally at the time the offer is presented, with a note of the disclosure in the broker's file
• d.In the contract to purchase and sell, or in a separate writing signed by the parties✓

Section 2079.17 requires the buyer's agent and the seller's agent each to disclose as soon as practicable whether they act for one party or as a dual agent, and requires that relationship to be confirmed in the contract to purchase and sell real property, or in a separate writing executed or acknowledged by the parties, prior to or coincident with execution of the contract. The statute prints the exact confirmation format, including the license numbers of the brokerage firm and the individual licensee. A closing statement comes far too late, an oral confirmation is not what the statute allows, and a listing service data sheet is not a document the parties sign.

Under Civil Code section 2079.21, which item is 'confidential information' that a dual agent may not reveal without express permission?

• a.That the property lies inside a mapped earthquake fault zone
• b.That the roof has an active leak the seller repaired temporarily
• c.That the seller would accept a price lower than the listing price✓
• d.That a prior escrow fell through when the buyer's loan was denied

Section 2079.21(c) defines confidential information as facts relating to the client's financial position, motivations, bargaining position or other personal information that may impact price, and it names the seller's willingness to accept less than the listing price and the buyer's willingness to pay more than the price offered as the examples. An active roof leak and a mapped fault zone are material facts about the property, which the agent has an affirmative duty to disclose rather than protect. A failed prior escrow may also be material to a buyer's evaluation, and section 2079.21(d) preserves all other disclosure duties.

Under Civil Code section 2079.19, the fact that the seller pays the buyer's agent's compensation means that:

• a.The buyer's agent automatically becomes a dual agent requiring both parties' consent
• b.The buyer's agent automatically becomes a subagent of the seller in the transaction
• c.The source of compensation is not necessarily determinative of the agency relationship✓
• d.The buyer's agent must refund the compensation and collect only from the buyer

Section 2079.19 states that the payment of compensation, or the obligation to pay it, is not necessarily determinative of a particular agency relationship, and that an agreement to share a commission is likewise not determinative. The statutory disclosure form makes the same point, telling buyers that an agent acting only for the buyer is not the seller's agent even if by agreement the agent is paid in whole or in part by the seller. Compensation therefore does not create subagency or dual agency on its own, and there is no rule requiring the buyer's agent to refuse or refund seller-sourced compensation.

A broker gives the buyer the agency disclosure form but never obtains a signed acknowledgment of receipt. Under Civil Code section 2079.14 the broker has:

• a.Failed to complete a step the statute expressly requires of the agent providing the form✓
• b.Complied fully, because the statute requires only delivery and not any acknowledgment
• c.Complied, provided the broker made a written note of the delivery in the transaction file
• d.Complied, because the acknowledgment obligation falls on the escrow holder at closing

Section 2079.14(b) states that the agent providing the disclosure form shall obtain a signed acknowledgment of receipt from the buyer or seller, subject only to the narrow substitute procedure in section 2079.15 for a party who refuses to sign. Delivery alone is therefore not enough. A file note is good practice but it is not the signed acknowledgment the statute names. And the obligation is placed on the agent providing the form, not on the escrow holder, whose role begins after the agency relationships are already disclosed and confirmed.

Under Business and Professions Code section 10177(o), a licensee acting as agent for a buyer must disclose to that buyer:

• a.The commission split the licensee has negotiated with the cooperating brokerage firm
• b.The identity of every other buyer who has toured the property in the past thirty days
• c.The nature and extent of the licensee's direct or indirect ownership interest✓
• d.The name of the lender the licensee expects the buyer will ultimately choose

Section 10177(o) makes it a ground for discipline to fail to disclose to a buyer, in a transaction where the licensee is the buyer's agent, the nature and extent of the licensee's direct or indirect ownership interest in the property, and it expressly extends the duty to interests held by a person related to the licensee by blood or marriage, by an entity in which the licensee has an ownership interest, or by any other person with whom the licensee has a special relationship. The identities of other visitors, the internal commission split and the buyer's future lender are not the subject of this section.

A California licensee buying property for the licensee's own account from a member of the public must:

• a.Obtain the Commissioner's written approval before submitting a written offer
• b.Withdraw the license to inactive status for the duration of the negotiation
• c.Disclose in writing that the licensee is acting as a principal✓
• d.Route the transaction through another brokerage so that no disclosure is needed

California requires a licensee dealing as a principal to disclose that status, and the point of the rule is that the public should know when the person across the table holds a license and is acting for their own account rather than as an agent. Concealing it invites discipline under section 10176(i) or section 10177(j) as fraud or dishonest dealing. Placing a license on inactive status does not erase the licensee's knowledge or the duty of honest dealing. The Commissioner does not pre-approve individual offers. And routing the deal through a colleague conceals rather than cures the interest.

Business and Professions Code section 10177.6 requires a licensee who both acts as agent in a sale and arranges the financing for it to disclose those roles in writing:

• a.At the first anniversary of the loan, to the borrower and the loan servicer
• b.Within 10 days, to the buyer only, and to the lender if the lender requests it
• c.Before the close of escrow, to whichever party is paying the licensee's compensation
• d.Within 24 hours, to all parties to the sale and to any related loan transaction✓

Section 10177.6 provides that when an agent undertakes to arrange financing in connection with a sale, lease or exchange, or when a person arranging that financing undertakes to act as an agent, the agent or person shall within 24 hours make a written disclosure of those roles to all parties to the sale, lease or exchange and to any related loan transaction. The window is 24 hours, not ten days, and the audience is all parties rather than one of them. Waiting for closing or for a loan anniversary is far outside the statutory period.

Which event does NOT terminate a California listing agreement by operation of law?

• a.The death or incapacity of the seller who signed the listing agreement
• b.The listing broker's decision to reduce the advertising budget for the property✓
• c.The destruction of the improvements that were the subject of the listing
• d.The expiration of the definite termination date stated in the agreement

An agency terminates by expiration of its stated term, mutual agreement, revocation by the principal, renunciation by the agent, full performance of its purpose, destruction of the subject matter, or the death, incapacity or bankruptcy of either party. Cutting the advertising budget is a business decision about how the broker performs and could support a claim that the broker breached the duty of diligence, but it does not end the agency. Death or incapacity of the principal ends the personal relationship, destruction of the improvements destroys the subject matter, and the termination date is the parties' own limit.

A seller revokes an exclusive right to sell listing in bad faith one week before it expires, then sells to a buyer the broker had introduced. Under California law the seller:

• a.Has committed a misdemeanor under the Real Estate Law and may be fined by the Commissioner
• b.Has ended both the agency and any obligation, because a principal may always revoke
• c.May have ended the agency but can still be liable to the broker in damages for the breach✓
• d.Must reinstate the listing for an additional term equal to the time remaining when it was revoked

A principal generally retains the power to revoke an agency even when there is no right to do so, but exercising a power without the right is a breach of contract, and the broker's remedy is damages, commonly the commission the broker would have earned. So the agency ends while the liability remains. The Real Estate Law's criminal provisions reach licensees and unlicensed practice, not a seller who breaks a listing. And no California statute forces a seller to reinstate a revoked listing; the courts award money rather than order the relationship to continue.

An exclusive listing states no termination date. Under California law the practical effect for the broker is that:

• a.The Commissioner will set a reasonable termination date on the broker's written application
• b.The listing automatically converts into an open listing enforceable against all brokers
• c.The listing runs for one year by statute and then renews for successive one-year terms
• d.The broker risks discipline under section 10176(f) if a fee is claimed under the agreement✓

Business and Professions Code section 10176(f) makes claiming, demanding or receiving a fee under an exclusive agreement lacking a definite, specified date of final and complete termination a ground for suspension or revocation, so the missing date creates disciplinary exposure the moment the broker seeks payment. California provides no statutory conversion of a defective exclusive listing into an open listing. There is no statutory one-year default term with automatic renewals. And the Commissioner does not supply missing contract terms on application; the remedy is to write the agreement correctly.

Business and Professions Code section 10136 provides that a broker suing for a commission in a California court must allege and prove that the broker:

• a.Was a member in good standing of a local real estate trade association
• b.Was duly licensed at the time the alleged cause of action arose✓
• c.Had filed a copy of the listing agreement with the Department of Real Estate
• d.Had obtained the Commissioner's written consent to commence the litigation

Section 10136 bars a person acting as a broker or salesperson from bringing or maintaining an action in California courts for compensation without alleging and proving that the person was a duly licensed real estate broker or salesperson at the time the alleged cause of action arose. Licensure at the relevant time is therefore an element of the claim, not merely a defense. Trade association membership is voluntary and legally irrelevant. Listings are not filed with the Department. And no statute requires the Commissioner to authorize a broker's civil suit.

Under Business and Professions Code section 10137, a California salesperson may accept compensation for licensed activity from:

• a.The seller directly, if the listing agreement names the salesperson personally
• b.Either the listing broker or the cooperating broker, whichever holds the deposit
• c.The broker under whom the salesperson is licensed at the time✓
• d.The escrow holder, provided the escrow instructions authorize the disbursement

Section 10137 provides that no real estate salesperson shall accept compensation for activity requiring a real estate license from any person other than the broker under whom the salesperson is at the time licensed, and it forbids a broker from compensating an unlicensed person for licensed acts. Payment from a cooperating broker bypasses the salesperson's own responsible broker and violates the section, even though brokers may share commissions with each other. Direct payment by the seller and direct disbursement by escrow to the salesperson do the same thing. Licensees may agree to share compensation, but any payment must pass through the responsible broker.

Business and Professions Code section 10147.5 requires a printed statement in at least 10-point boldface, immediately before the compensation provision, telling the parties that:

• a.The compensation must be paid from escrow before any lien holder is paid
• b.The compensation has been reviewed and approved by the Real Estate Commissioner
• c.The compensation is deductible by the seller against the gain realized on the sale
• d.The amount or rate of compensation is not fixed by law and may be negotiable✓

Section 10147.5 requires a form agreement that establishes or alters a right to compensation for the sale or purchase of residential property of not more than four units, or of a mobilehome, to carry the notice that the amount or rate of real estate commissions is not fixed by law, that they are set by each broker individually, and that they may be negotiable between the parties, in at least 10-point boldface type immediately preceding the compensation provision. Amendments effective 1 January 2026 extended the buyer-side version of the notice. The Commissioner approves no commission, and the section says nothing about tax treatment or payment priority.

Civil Code section 2079 imposes on the listing broker and cooperating brokers a duty toward a prospective buyer of one-to-four residential units to:

• a.Verify the accuracy of every representation the seller makes on the disclosure form
• b.Obtain a structural pest control report and deliver it before the offer is written
• c.Warrant that the property is free of defects for two years after the close of escrow
• d.Conduct a reasonably competent and diligent visual inspection and disclose what it reveals✓

Section 2079 requires a broker or salesperson to conduct a reasonably competent and diligent visual inspection of residential property of one to four dwelling units, or a manufactured home, and to disclose to the prospective buyer all facts materially affecting value or desirability that the investigation would reveal. That is an inspection and disclosure duty, not a duty to procure a pest report, which is a negotiated term. The statute creates no warranty of condition. And it does not make the agent the guarantor of the seller's statements, though an agent who knows a statement is false cannot pass it along.

Under Civil Code section 2079.3, the visual inspection a California broker must perform does NOT extend to:

• a.Areas normally inaccessible, off-site areas, and public records or permits✓
• b.The interior living areas of the dwelling that the seller has made available for showing
• c.Visible water staining on a ceiling in a bedroom that the buyer toured with the agent
• d.An obviously sagging deck attached to the rear of the house and visible from the yard

Section 2079.3 limits the statutory inspection: it does not include areas reasonably and normally inaccessible to that type of inspection, an affirmative inspection of off-site areas, or an examination of public records or permits concerning title or use, and in a condominium, planned development or stock cooperative it extends no further than the unit offered for sale. Accessible interior areas, visible water staining and a visibly sagging deck are all within a reasonably competent visual inspection, and a broker who sees such conditions must disclose them.

Civil Code section 2079.4 provides that an action for breach of the broker's statutory inspection duty must be commenced no later than:

• a.Four years from the date the buyer discovers the undisclosed condition on the property
• b.Two years from the date of possession, meaning recordation, close of escrow or occupancy✓
• c.Ten years from substantial completion of the improvements, matching the construction defect period
• d.One year from the date the broker's license is renewed following the transaction

Section 2079.4 states that in no event shall the time for commencing a legal action for breach of the duty imposed by the article exceed two years from the date of possession, which the section defines as the date of recordation, the date of close of escrow or the date of occupancy, whichever occurs first. It is an outside limit measured from possession, not a discovery rule running four years. The ten-year period belongs to the latent construction defect statute of repose. And license renewal has no bearing on when a buyer's claim expires.

Which set states the four elements that must be present before a thing has value in appraisal theory?

• a.Utility, scarcity, demand and transferability✓
• b.Cost, price, income and depreciation
• c.Land, labor, capital and entrepreneurship
• d.Time, title, interest and possession

The four elements of value are utility, scarcity, demand and transferability, sometimes remembered as DUST. Remove any one and value collapses: air is useful but not scarce, and land that cannot be transferred has no market. Cost, price and income are measures used in the three approaches rather than elements of value itself. Land, labor, capital and entrepreneurship are the agents of production in economics. Time, title, interest and possession are the four unities required to create a joint tenancy, which is a co-ownership concept and not a valuation one.

A house cost $700,000 to build in 2019, recently sold for $850,000, and an appraiser's opinion places it at $830,000. Which statement correctly distinguishes the three figures?

• a.$700,000 is price, $850,000 is value, and $830,000 is the replacement cost new
• b.$700,000 is value, $850,000 is cost, and $830,000 is the price the market paid
• c.$700,000 is cost, $850,000 is price, and $830,000 is the appraiser's opinion of value✓
• d.All three figures state value, because each was produced by a market participant

Cost is what was spent to create the improvement, price is what a particular buyer actually paid in a particular transaction, and value is an opinion of worth developed under a stated definition such as market value. The three converge only by coincidence, and the exam tests that a broker keeps them apart. A single sale price can be above or below market value because of atypical motivation, unusual financing or a short marketing period, which is why an appraiser researches whether a transaction met the conditions requisite to a fair sale before using it as a comparable.

The principle of substitution holds that a prudent buyer will pay no more for a property than:

• a.The replacement cost of the improvements before any deduction for depreciation
• b.The amount the current owner originally paid, adjusted for inflation since purchase
• c.The cost of acquiring an equally desirable substitute property without undue delay✓
• d.The total of the property tax assessments levied on the parcel over the past decade

Substitution is the principle that value tends to be set by the cost of acquiring an equally desirable substitute, assuming no costly delay in making the substitution. It underlies all three approaches: comparable sales in the sales comparison approach, the cost of building an equivalent structure in the cost approach, and an alternative investment's yield in the income approach. What the current owner paid is a historical fact that the market ignores. Undepreciated replacement cost overstates value for an older building. And assessed values reflect Proposition 13 mechanics rather than current market worth.

An appraiser concludes that a corner lot improved with a small cottage would be worth more as a site for a four-unit building permitted by its zoning. This conclusion applies the principle of:

• a.Highest and best use, being the legally permissible use producing the greatest value✓
• b.Conformity, being the tendency of maximum value to arise where uses are reasonably similar
• c.Regression, being the tendency of a superior property to be pulled down by inferior neighbors
• d.Anticipation, being the present worth of the future benefits expected from the property

Highest and best use is the reasonably probable use that is legally permissible, physically possible, financially feasible and maximally productive, and it is the first analytical step in an appraisal because it determines what is being valued. Conformity concerns the similarity of surrounding uses. Regression describes the drag an inferior neighborhood exerts on a superior property, and progression the opposite. Anticipation explains why an income property is worth the present value of its expected future benefits, which matters in the income approach but is not the reasoning used here.

The most expensive house on a street of modest homes tends to sell for less than it would in a neighborhood of comparable homes. This illustrates:

• a.Contribution, in which a component adds value equal to what it adds to the whole, not its cost
• b.Progression, in which the value of a modest property is lifted by superior surrounding properties
• c.Regression, in which the value of a superior property is reduced by inferior surrounding properties✓
• d.Plottage, in which combining adjoining parcels under one owner produces added value called assemblage

Regression is the tendency of a property of higher quality to be pulled toward the level of the lesser properties around it, which is why over-improvement is a recognized valuation risk. Progression is the mirror image, lifting the modest property. Contribution measures what an individual component such as a second bathroom adds to the value of the whole, which frequently differs from what it cost to install. Plottage is the increment in value created when adjoining parcels are combined into a single larger, more useful parcel, and the process of combining them is assemblage.

In California, an opinion of value given by a real estate licensee in the ordinary course of the licensee's business, such as a competitive market analysis:

• a.Requires the licensee to hold a state-certified general appraiser credential before it is prepared
• b.Is an appraisal that must comply with the Uniform Standards of Professional Appraisal Practice
• c.May be used in place of an appraisal for any federally related mortgage loan transaction
• d.Is not an appraisal under Business and Professions Code section 11302 and may not be called one✓

Business and Professions Code section 11302(b) excludes from the definition of appraisal an opinion of value given by a real estate licensee in the ordinary course of the licensee's business in connection with a function for which a real estate license is required, and it adds that the opinion shall not be referred to as an appraisal. So a broker may prepare a competitive market analysis but must not label it an appraisal. It cannot substitute for the appraisal a federally related transaction requires, and preparing it does not require an appraiser credential.

Business and Professions Code section 10177.3 makes it a ground for discipline for a California licensee to:

• a.Knowingly or intentionally misrepresent the value of real property✓
• b.Give a client an opinion of value that later proves higher than the sale price
• c.Prepare a competitive market analysis without a written request from the seller
• d.Recommend a listing price that differs from the county assessor's assessed value

Section 10177.3 states plainly that no licensee shall knowingly or intentionally misrepresent the value of real property, and subdivision (b) adds that a licensee offering an opinion of value used as the basis for originating a mortgage loan shall not hold a prohibited interest in the property. The offense is knowing or intentional misstatement, so an honest opinion that the market later contradicts is not a violation. No statute requires a written request before a market analysis is prepared. And an assessed value under Proposition 13 often diverges sharply from market value, so a difference is expected.

Which definition matches market value as it is normally stated in an appraisal assignment?

• a.The highest price any single buyer in the market would be willing to pay under any circumstances
• b.The most probable price in a competitive and open market with both parties acting prudently✓
• c.The amount of the largest loan an institutional lender would advance against the property
• d.The sum of the land value and the undepreciated cost of constructing the improvements

Market value is the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. The highest price any buyer would pay describes investment value to a particular purchaser, which can far exceed market value. Loan value is a lender's underwriting figure derived from value rather than a definition of it. And land plus undepreciated cost is a mechanical sum that ignores depreciation and the market.

In the sales comparison approach, when a comparable property has a feature the subject lacks, the appraiser:

• a.Subtracts value from the comparable, since adjustments are made to the comparable alone✓
• b.Adds value to the subject, because the subject must be brought up to the comparable's level
• c.Adds value to the comparable, because the feature makes the comparable more desirable
• d.Makes no adjustment, because feature differences are handled in the reconciliation stage

The governing rule is that the appraiser adjusts the comparable, never the subject, because the subject's value is the unknown being solved for. If the comparable is superior, its price is adjusted downward to answer what it would have sold for had it been like the subject. If the comparable is inferior, its price is adjusted upward. Adding value to the subject inverts the method. And reconciliation is the final weighing of indicated values from the several approaches, which happens after adjustments, not instead of them.

A comparable sold for $600,000. It has a pool worth $20,000 that the subject lacks, and the subject has an extra bedroom worth $30,000 that the comparable lacks. The adjusted indicated value of the subject is:

• a.$590,000
• b.$650,000
• c.$610,000✓
• d.$550,000

Adjust the comparable, not the subject. The comparable is superior by a $20,000 pool, so subtract $20,000. The comparable is inferior by a bedroom worth $30,000, so add $30,000. Starting at $600,000 gives $600,000 minus $20,000 plus $30,000, or $610,000. Adding both amounts gives $650,000 and adjusting in the wrong direction on both gives $590,000, each of which reverses one or both signs. The figure $550,000 subtracts both differences. The arithmetic is simple by design; the discipline is in the direction of each adjustment, not in the sums.

Which approach to value would an appraiser weight most heavily in valuing a newly built public library?

• a.The gross rent multiplier method, because it converts rent into value with a single factor
• b.The sales comparison approach, because recent sales are the best evidence of market behavior
• c.The income approach, because the building generates measurable benefits to the community
• d.The cost approach, because there are few comparable sales and no income stream to capitalize✓

The cost approach is most persuasive for new or special-purpose improvements: a library is rarely sold, so there are no meaningful comparables, and it produces no rent to capitalize. Because the improvement is new, accrued depreciation is minimal, which is the condition in which the cost approach is at its strongest. The sales comparison approach fails for want of comparables. The income approach needs a market-derived income stream, which community benefit is not. And a gross rent multiplier is a screening device for small rental properties.

In the cost approach, which form of depreciation is by definition incurable and originates outside the property boundary?

• a.Physical deterioration, such as a worn roof covering nearing the end of its life
• b.External obsolescence, such as a new freeway interchange built next to the parcel✓
• c.Functional obsolescence, such as a four-bedroom house with a single bathroom
• d.Accrued depreciation, being the total loss in value from all causes combined

External obsolescence, also called economic obsolescence, is caused by influences outside the property such as traffic, a change in the neighborhood, or a downturn in the local economy, and because the owner cannot fix what lies off the parcel it is treated as incurable. Physical deterioration is wear and tear and is often curable by repair. Functional obsolescence arises from a defect in the design or utility of the improvement itself and may be curable or incurable. Accrued depreciation is the umbrella term for the total loss in value from all three causes.

An income property produces a net operating income of $60,000. Investors in that market require a 6 percent capitalization rate. Using the income approach the indicated value is:

• a.$360,000
• b.$1,000,000✓
• c.$100,000
• d.$3,600,000

In direct capitalization, value equals net operating income divided by the capitalization rate. Dividing $60,000 by 0.06 gives $1,000,000. Multiplying instead of dividing gives $60,000 times 0.06, or $3,600, which is not among the choices; the $360,000 and $3,600,000 options are that same multiplication done after misreading the 6 percent rate as 6 or as 60. Dividing $60,000 by 0.6 gives $100,000. Committing the relationship to memory in all three forms, so that rate equals income divided by value and income equals value times rate, lets a candidate solve any of the three variants.

Holding net operating income constant, an increase in the capitalization rate an investor demands will:

• a.Decrease the indicated value, because value is income divided by the rate✓
• b.Increase the indicated value, because a higher rate signals a stronger income stream
• c.Leave value unchanged, because the rate affects only the loan the buyer can obtain
• d.Increase the net operating income, because expenses are capitalized at the same rate

Because value equals net operating income divided by the capitalization rate, the rate sits in the denominator and moves value in the opposite direction. A rate rising from 5 percent to 8 percent on the same income cuts the indicated value substantially, which is why rising required yields depress income property values. A higher rate signals greater perceived risk or a higher alternative return, not a stronger income stream. The rate is a valuation input rather than a financing term. And net operating income is derived from the property's own revenues and expenses, so capitalization does not change it.

A four-unit building rents for $4,000 a month and similar buildings in the area sell at a gross rent multiplier of 150. The indicated value is:

• a.$60,000
• b.$600,000✓
• c.$26,700
• d.$4,000,000

A gross rent multiplier stated against monthly rent is applied by multiplying the monthly gross rent by the multiplier, so $4,000 times 150 gives $600,000. Dividing the rent by the multiplier gives about $26.70, and the $26,700 option is that same quotient with the decimal shifted three places; dividing the multiplier by the rent gives 0.0375, which measures nothing here. The key caution is that a multiplier drawn from monthly rents must be applied to monthly rents and one drawn from annual rents to annual rents; mixing them shifts the answer by a factor of twelve. Because it ignores expenses and vacancy, a multiplier screens rather than replaces capitalization.

Which sequence correctly states the steps of the cost approach?

• a.Estimate land value, add the replacement cost of improvements, then subtract accrued depreciation✓
• b.Estimate the reproduction cost, subtract land value, then add accrued depreciation to the remainder
• c.Capitalize the net operating income, subtract the mortgage balance, then add the land value
• d.Average the three most recent comparable sales, then adjust the average for market conditions

The cost approach estimates the value of the site as if vacant and available for its highest and best use, adds the current cost to reproduce or replace the improvements, and subtracts all accrued depreciation from that cost. Land is added, never subtracted, because land is not depreciated in this method. Capitalizing income and deducting a mortgage describes an equity valuation exercise rather than the cost approach. And averaging comparable sales without adjusting each one for its differences from the subject abandons the discipline that makes the sales comparison approach reliable.

Reproduction cost differs from replacement cost in that reproduction cost estimates the cost to build:

• a.A structure of equal utility using current materials, standards and design
• b.An exact duplicate of the improvement, outdated features included✓
• c.Only the portion of the improvement that has not yet suffered physical deterioration
• d.The improvement at the price level prevailing on the date the original permit was issued

Reproduction cost is the cost to construct an exact replica of the subject improvement using the same or closely similar materials, carrying forward whatever superadequacies or outdated features it has. Replacement cost is the cost to build a structure of equivalent utility using current materials, standards and design, so it already removes some functional obsolescence. Neither concept limits itself to the undeteriorated portion, since depreciation is deducted afterward. And both are measured at current cost levels on the effective date of the appraisal, not at historical prices.

An appraiser weighs the indicated values from the three approaches and forms a single conclusion. This final step is called:

• a.Capitalization, in which the strongest indication is converted into a rate of return
• b.Averaging, in which the three indications are added together and divided by three
• c.Reconciliation, in which the approaches are weighted by their reliability✓
• d.Amortization, in which the value indications are spread across the remaining economic life

Reconciliation is the appraiser's analysis of the strengths and weaknesses of each approach in light of the property type, the assignment and the quality of the data, producing a single value opinion. It is expressly not an average: mechanically averaging a weak indication with a strong one imports the weakness. Capitalization converts income into value and belongs inside the income approach. Amortization is the systematic repayment of a loan over time and is a finance concept, not a step in the appraisal process.

For a single-family residence in an established California tract, an appraiser will normally give the greatest weight to:

• a.The sales comparison approach, because ample arm's length sales of similar homes exist✓
• b.The cost approach, because construction costs are the most objective data available
• c.The income approach, because the home could be rented at prevailing market rents
• d.The gross rent multiplier, because it is simpler than a full capitalization analysis

Owner-occupied houses in an established tract trade frequently, so the sales comparison approach rests on abundant arm's length evidence of what buyers actually pay and is the primary approach for that property type. The cost approach is undermined by the difficulty of measuring accrued depreciation in an older home and by the fact that buyers of houses do not think in construction cost terms. The income approach fits properties bought for their income, which a family residence generally is not. And a gross rent multiplier is a rough screening tool for small rental property.

Which situation would most likely disqualify a recent sale from use as a comparable in an appraisal?

• a.The buyer paid all cash rather than obtaining conventional financing
• b.The sale closed eleven weeks before the effective date of the appraisal
• c.The sale was between a parent and child at a price set for family reasons✓
• d.The property is two blocks farther from the school than the subject property

Market value assumes a transaction between parties acting prudently and knowledgeably in their own interest, so a sale between related parties at a price set for family reasons is not an arm's length transaction and cannot support a market value conclusion without heavy qualification. A sale eleven weeks old is recent enough to use, adjusted for any change in market conditions. An all-cash purchase is a financing characteristic that may call for a small adjustment rather than exclusion. And a two-block location difference is exactly the kind of variance a location adjustment handles.