California Real Estate Broker Exam — All Questions

Net operating income for an income property is computed as:

• a.Cash flow before taxes plus the principal portion of the annual mortgage payment
• b.Effective gross income less operating expenses and less the annual mortgage payment
• c.Potential gross income less vacancy, operating expenses, depreciation and income tax
• d.Effective gross income less operating expenses, before debt service and income tax✓

Net operating income is effective gross income minus operating expenses, and it is deliberately calculated before debt service, income tax and depreciation. That is what makes it comparable across properties financed differently: two identical buildings produce the same net operating income whether one is free and clear and the other heavily leveraged. Subtracting the mortgage payment produces cash flow before taxes, a different figure. Depreciation and income tax are owner-specific and are excluded. And adding back a principal component confuses a financing item with an operating one.

Which expense is properly excluded from operating expenses when computing net operating income?

• a.The property management fee paid to a licensed California property manager
• b.The annual premium for the property's hazard and liability insurance coverage
• c.The interest and principal paid on the deed of trust encumbering the property✓
• d.The recurring cost of routine repairs and maintenance of the common areas

Debt service is a financing cost belonging to the owner rather than to the property, so it is excluded from operating expenses and deducted only after net operating income to arrive at cash flow. Hazard and liability insurance, management fees and routine repairs and maintenance are all ordinary operating expenses necessary to keep the property producing income, and each is deducted in arriving at net operating income. Capital improvements and income taxes are likewise excluded, for the same reason: they do not measure the property's own operating performance.

An investor pays $200,000 cash toward a building and receives $16,000 of pre-tax cash flow in the first year. The cash-on-cash return is:

• a.12.5 percent
• b.8 percent✓
• c.16 percent
• d.1.25 percent

Cash-on-cash return divides the annual pre-tax cash flow by the cash actually invested, so $16,000 divided by $200,000 gives 0.08, or 8 percent. Dividing the investment by the cash flow gives 12.5, which is a multiplier rather than a return. The figure 16 percent would result from using a $100,000 investment. And 1.25 percent misplaces the decimal. Cash-on-cash differs from the capitalization rate because it is measured against the equity the investor put in rather than against the total value of the property.

Positive leverage exists when an investor uses borrowed money and:

• a.The property's assessed value is lower than the price the investor paid
• b.The loan-to-value ratio is below 50 percent of the purchase price
• c.The loan carries a fixed rate rather than an adjustable rate of interest
• d.The property's rate of return exceeds the cost of the borrowed funds✓

Leverage is positive when the property earns a higher return than the interest cost of the debt used to buy it, so borrowing magnifies the return on the investor's own equity. When the cost of the debt exceeds the property's return, leverage is negative and borrowing reduces the equity return. The loan-to-value ratio measures how much debt is used, not whether it pays to use it. Whether the rate is fixed or adjustable affects risk rather than the sign of the leverage. And the relationship between assessed and market value is a property tax matter.

Under Proposition 13, when a California buyer purchases a home, the property's assessed value is normally:

• a.Carried over from the seller unchanged, so the buyer inherits the seller's old tax bill
• b.Reset to the purchase price as a new base year value for the buyer✓
• c.Set at half of the purchase price for the first four years of the buyer's ownership
• d.Determined each year by a fresh market appraisal performed by the county assessor

A change in ownership is a reassessment event under Proposition 13, so the property is assessed at full cash value, ordinarily the purchase price, which becomes the new base year value; annual increases are then capped at 2 percent. That is why a buyer should be warned that the tax bill will not resemble the long-time seller's. Assessed value carries over only where an exclusion applies, such as certain transfers between spouses or a qualifying base year value transfer under Proposition 19. There is no half-value phase-in, and annual market revaluation is what Proposition 13 abolished.

An investor exchanges an apartment building for another investment property and defers the gain under Internal Revenue Code section 1031. Which condition must be satisfied?

• a.Both properties must be encumbered by loans from the same institutional lender
• b.Both properties must be located within the boundaries of the State of California
• c.Both properties must produce identical annual net operating income figures
• d.Both properties must be held for productive use in a business or for investment✓

A section 1031 exchange defers gain when property held for productive use in a trade or business or for investment is exchanged for like-kind property held for the same purposes. A personal residence does not qualify. Like-kind is read broadly for real property, so an apartment building may be exchanged for raw land or a commercial building, and the properties need not be in the same state. There is no requirement that the incomes match. And the identity of the lender is irrelevant, although differences in debt relief can create taxable boot.

A California income property has potential gross income of $120,000, a vacancy and collection loss of $12,000, and operating expenses of $48,000. Its net operating income is:

• a.$108,000
• b.$72,000
• c.$60,000✓
• d.$180,000

Deduct the vacancy and collection loss from potential gross income to get effective gross income of $108,000, then deduct operating expenses of $48,000 to reach a net operating income of $60,000. The figure $108,000 is effective gross income, which is the intermediate step rather than the answer. The figure $72,000 results from deducting expenses but forgetting vacancy. And $180,000 adds the figures instead of subtracting them. Keeping the ladder in order — potential gross, effective gross, net operating, then cash flow — prevents most errors on this kind of item.

For an investor who owns California residential rental property, cost recovery, commonly called depreciation, may be taken on:

• a.The land and improvements together, allocated in proportion to the county assessment
• b.The land only, because land is the component that loses value as the area develops
• c.The improvements only, because land is not depreciable for federal income tax purposes✓
• d.Neither, because residential rental property is excluded from cost recovery entirely

Federal tax law allows cost recovery on the depreciable improvements but not on land, which is treated as having an indefinite life, so the purchase price must be allocated between the two. Because a larger improvement allocation produces a larger annual deduction, the allocation is a point of genuine consequence to an investor. Land is never depreciable, so neither a land-only nor a combined approach is correct. And residential rental property is squarely depreciable, over a recovery period longer than that used for equipment and shorter than that for nonresidential real property.

A California deed of trust involves three parties. The party who holds bare legal title with a power of sale is the:

• a.Beneficiary, who advances the loan funds and is entitled to repayment under the note
• b.Trustor, who borrows the money and signs the promissory note and the security instrument
• c.Trustee, who reconveys on payoff or sells on default at the beneficiary's direction✓
• d.Vendor, who conveys equitable title and retains legal title until the balance is paid

In a California deed of trust the trustor is the borrower, the beneficiary is the lender, and the trustee is the neutral third party who holds bare legal title with a power of sale. On payoff the trustee executes a deed of reconveyance, and on default the trustee conducts the non-judicial sale at the beneficiary's direction. The trustor and beneficiary are named correctly in the other options but assigned the wrong role. A vendor retaining legal title while the purchaser holds equitable title describes a real property sales contract under Civil Code section 2985, not a deed of trust.

Which statement best describes the difference between a promissory note and a deed of trust?

• a.Both are security instruments, and only one of them may be recorded in California
• b.The note is the security for the debt and the deed of trust is the evidence of it
• c.Both are evidence of the debt, and only one of them needs to be signed by the borrower
• d.The note is the evidence of the debt and the deed of trust is the security for it✓

The promissory note is the borrower's written promise to repay and is the evidence of the debt; the deed of trust is the security instrument that pledges the real property so the lender can foreclose if the note is not paid. The note is normally not recorded, while the deed of trust is recorded to give constructive notice and fix priority. Reversing the two inverts the relationship. The borrower signs both. And because the note creates no interest in land, it is not a security instrument at all.

A California lender's deed of trust contains a due-on-sale clause. The clause allows the lender to:

• a.Require the borrower to pay a penalty for repaying the loan ahead of schedule
• b.Increase the interest rate automatically once each year for the life of the loan
• c.Call the entire balance due if the property is sold or transferred without consent✓
• d.Add unpaid interest to principal so that the balance grows during the loan term

A due-on-sale clause, also called an alienation clause, entitles the lender to accelerate the balance if the secured property is sold or otherwise transferred without consent, which is why most modern loans cannot simply be taken subject to or assumed. An annual rate adjustment is the feature of an adjustable rate loan and is governed by an index and margin. A charge for early payoff is a prepayment penalty, restricted for certain California loans by Business and Professions Code section 10242.6. And adding unpaid interest to principal is negative amortization.

A borrower's payment on a fully amortized fixed-rate loan stays level, but over time the portion applied to principal:

• a.Increases, while the portion applied to interest decreases✓
• b.Decreases, while the portion applied to interest increases
• c.Stays constant, because the payment itself never changes
• d.Varies with the index to which the note rate is tied

Interest on an amortized loan is charged on the outstanding balance, so as the balance falls the interest portion of each level payment falls with it and the principal portion grows. That is why the early years of a thirty-year loan pay down very little principal. The reverse pattern would require a growing balance. A constant split is impossible where the payment is level and the balance is declining. And tying the split to an index describes an adjustable rate loan, in which it is the interest rate rather than the amortization pattern that moves.

A loan whose scheduled payments do not retire the debt, so that a large final payment is required, is called:

• a.A straight note, on which interest is paid periodically and the principal falls due in one sum
• b.A fully amortized loan, in which the final payment equals every earlier installment
• c.A balloon payment loan, whose final payment is more than twice the smallest installment✓
• d.A wraparound loan, in which a new lender collects on and services the existing senior loan

A balloon payment loan is partially amortized so that a substantial final payment remains, and Business and Professions Code section 10244 uses the benchmark that no installment, including the final one, be greater than twice the amount of the smallest installment for the short-term loans it covers. A fully amortized loan retires itself, so no balloon exists. A straight note calls for interest-only payments with the whole principal due at maturity, which is a related but distinct instrument. A wraparound is an all-inclusive deed of trust layered over an existing loan.

Which instrument allows a borrower to draw, repay and redraw against the equity in a California residence up to an approved limit?

• a.A purchase money first deed of trust taken back by the seller at the close of escrow
• b.A home equity line of credit secured by a junior deed of trust on the residence✓
• c.A blanket deed of trust covering several parcels with a partial release provision
• d.A package loan financing both the real property and the personal property inside it

A home equity line of credit is revolving credit secured by a deed of trust, usually a junior lien, that lets the borrower draw and repay repeatedly during a draw period. A purchase money deed of trust taken back by the seller finances the purchase price and is a fixed obligation. A blanket deed of trust encumbers more than one parcel and typically carries a partial release clause so individual lots can be sold free of the lien. A package loan finances real property together with items of personal property such as appliances or furniture.

In the mortgage market, the secondary market consists of:

• a.Brokers who arrange loans for borrowers in exchange for a commission paid by the lender
• b.Lenders that originate junior liens after a first deed of trust has already been recorded
• c.Escrow companies that disburse the loan proceeds at the close of the purchase transaction
• d.Investors and agencies that buy existing loans from the lenders that made them✓

The primary market is where loans are originated with borrowers; the secondary market is where existing loans are bought and sold among investors and agencies such as Fannie Mae, Freddie Mac and Ginnie Mae, which replenishes the originator's funds so it can lend again. The label has nothing to do with lien position, so a second deed of trust originated by a lender is still a primary market transaction. Escrow companies disburse funds but do not buy loans. And a loan broker arranging a loan is operating in the primary market.

Which source of real estate financing is a depository institution regulated primarily for the safety of insured deposits?

• a.A mortgage banker funding loans from a warehouse line and selling them onward
• b.A private individual lending personal funds through a licensed loan broker
• c.A federally insured commercial bank funding loans from customer deposits✓
• d.A real estate investment trust pooling investor capital to hold mortgage assets

A commercial bank is a depository institution: it takes insured deposits and is regulated first for the safety and soundness of those deposits, which shapes what it will lend on and on what terms. A private party lending personal money through a broker is an individual investor, and in California the loan brokerage rules in Article 7 of the Real Estate Law govern how a licensee may arrange that loan. A mortgage banker funds from credit lines rather than deposits and sells its production. And a real estate investment trust is a pooled investment vehicle, not a depository.

The California Veterans Farm and Home Purchase Program, commonly called CalVet, differs structurally from a conventional purchase loan because the Department of Veterans Affairs:

• a.Purchases the completed loan from a private lender and places it in a mortgage-backed pool
• b.Guarantees a portion of a private lender's loan against loss but never takes title itself
• c.Insures the entire loan for the private lender in exchange for an annual insurance premium
• d.Buys the property and sells it to the veteran under a contract of sale✓

Under the CalVet program the California Department of Veterans Affairs itself purchases the property selected by the eligible veteran and then sells it to the veteran under a contract of sale, retaining legal title until the balance is repaid. That is why CalVet is often described as a land contract rather than a loan. Guaranteeing a private lender's loan describes the federal VA program. Insuring the loan for a premium describes FHA. Buying completed loans for securitization describes the secondary market agencies.

An FHA-insured loan differs from a conventional loan chiefly in that FHA:

• a.Requires that the property be occupied by a veteran of the armed forces
• b.Lends the money directly to the borrower from a federal appropriation
• c.Sets the maximum sale price a seller may charge for the insured property
• d.Insures the approved lender against loss on the loan✓

The Federal Housing Administration does not lend; it insures approved lenders against loss on qualifying loans, and the borrower funds that protection through an up-front and an annual mortgage insurance premium. Because the risk is insured, lenders accept smaller down payments. FHA does not appropriate funds to borrowers. It appraises the property for insurance purposes and issues a value conclusion but does not cap what a seller may ask. And veteran occupancy is a feature of the VA and CalVet programs rather than of FHA.

Under Civil Code section 2924c, a California trustor in default under a deed of trust generally may reinstate the loan by curing the default:

• a.Only before the notice of default has been recorded by the trustee
• b.At any time within one year after the trustee's sale has been completed
• c.Up to five business days before the date set for the trustee's sale✓
• d.Only with the written consent of every junior lienholder of record

Section 2924c gives the trustor the right to cure the default and reinstate the obligation by paying the delinquent amounts plus permitted costs and expenses, and the statutory notice states that this right normally runs until five business days before the date set for the sale. The one-year period belongs to the statutory right of redemption after a judicial foreclosure, which non-judicial sales do not carry. The right arises after the notice of default is recorded, not before it. And reinstatement is the trustor's own right, requiring no consent from junior lienholders.

Code of Civil Procedure section 580d bars a lender from obtaining a deficiency judgment after:

• a.The recording of a notice of default that the borrower fails to cure in time
• b.A judicial foreclosure in which the property sells for less than the debt
• c.The borrower's discharge of the obligation in a chapter 7 bankruptcy proceeding
• d.A non-judicial trustee's sale conducted under the power of sale in the deed of trust✓

Section 580d bars a deficiency judgment after a sale conducted under the power of sale in a deed of trust, which is why a lender that wants to pursue the borrower personally must foreclose judicially instead. Judicial foreclosure preserves the possibility of a deficiency, subject to fair value limits and the borrower's redemption rights. A bankruptcy discharge is federal relief and operates on a different footing. And the recording of a notice of default merely begins the process; it decides nothing about deficiency liability.

Code of Civil Procedure section 580b protects a California borrower from a deficiency judgment on:

• a.A commercial loan secured by an office building where the borrower is a corporation
• b.Any refinance loan taken out after the borrower has owned the property for five years
• c.A seller carryback loan, and a purchase money loan on an owner-occupied dwelling✓
• d.A home equity line of credit used to consolidate the borrower's unsecured debts

Section 580b bars a deficiency under a deed of trust given to the vendor to secure the balance of the purchase price, and under a deed of trust on a dwelling for not more than four families given to a lender to secure a loan used to pay all or part of the purchase price of that dwelling, occupied in whole or in part by the purchaser. Subdivision (b) extends the protection to refinances of a purchase money loan, but only to the extent they do not advance new principal. Commercial loans and cash-out equity lines used for other purposes fall outside the section.

The federal Truth in Lending Act requires a residential mortgage disclosure of the cost of credit expressed as:

• a.The note rate alone, excluding all points, fees and other charges paid by the borrower
• b.The annual percentage rate, which combines interest with certain finance charges paid✓
• c.The capitalization rate the lender would apply if the property were an income property
• d.The loan-to-value ratio computed from the appraised value of the security property

The annual percentage rate is Truth in Lending's standardized measure of the cost of credit, combining the note rate with prepaid finance charges so that borrowers can compare offers on a common basis. It is normally higher than the note rate for that reason. The note rate alone is exactly what the statute refuses to treat as the full cost. A capitalization rate is a valuation input for income property. And a loan-to-value ratio measures how much is being borrowed against value rather than what the borrowing costs.

The federal Equal Credit Opportunity Act prohibits a lender from discriminating against a credit applicant on the basis of:

• a.Race, color, religion, national origin, sex, marital status, age or public assistance✓
• b.The applicant's credit history, outstanding debts and record of past late payments
• c.The applicant's employment stability and the verified amount of the applicant's income
• d.The condition, location and appraised value of the property offered as security

The Equal Credit Opportunity Act lists race, color, religion, national origin, sex, marital status and age as prohibited bases, and adds that income from a public assistance program may not be used against the applicant, provided the applicant has the capacity to contract. Credit history, existing obligations, employment stability and verified income are legitimate underwriting factors the statute leaves untouched. So is the quality of the collateral, although appraising a property lower because of the racial composition of its neighborhood is unlawful under fair lending and fair housing law.

Business and Professions Code section 10240 requires a California broker who negotiates a loan secured by real property to deliver the mortgage loan disclosure statement:

• a.Within three business days after a completed written loan application, or before the borrower is obligated✓
• b.Within thirty calendar days after the written loan application, or after the note is signed, whichever is later
• c.At the close of escrow, or when the escrow holder issues the final settlement statement, whichever is later
• d.Within one week after the deed of trust is recorded, or after the loan funds are released, whichever is later

Section 10240 requires the statement containing the information listed in section 10241 to be delivered within three business days after receipt of a completed written loan application or before the borrower becomes obligated on the note, whichever is earlier, signed personally by the borrower and by the broker or the licensee acting for the broker. The broker must keep a true copy for three years. The one-week recording duty belongs to section 10141.5 and concerns recording the deed of trust after closing, and the one-month duty in section 10141 concerns reporting the selling price.

Under Business and Professions Code section 10085.6, a California licensee who negotiates a residential mortgage loan modification for a fee may not:

• a.Advertise the service in any medium other than the licensee's own internet website
• b.Charge more than five percent of the outstanding principal balance of the modified loan
• c.Negotiate with the lender unless the borrower is already more than ninety days delinquent
• d.Collect any compensation until every service contracted for has been fully performed✓

Section 10085.6 makes it unlawful for a licensee performing a mortgage loan modification or other forbearance for borrower-paid compensation to claim, demand, charge, collect or receive any compensation until the licensee has fully performed each and every service contracted for, and it also forbids taking a wage assignment, a lien or a power of attorney to secure payment. The prohibition is on advance fees, not on a percentage. There is no delinquency threshold. And section 10147.6 regulates a required borrower notice rather than restricting advertising media.

A California real estate broker who takes residential mortgage loan applications and offers or negotiates loan terms for compensation must:

• a.Surrender the real estate broker license and apply instead for a finance lender license
• b.Obtain a mortgage loan originator license endorsement and a unique identifier✓
• c.Register the activity annually with the county recorder in each county where loans are made
• d.Operate only through a corporation, because an individual may not hold the endorsement

The federal SAFE Act as implemented in the Real Estate Law requires a licensee engaged in mortgage loan origination to hold a mortgage loan originator license endorsement issued by the Department of Real Estate and to obtain a unique identifier from the Nationwide Multistate Licensing System and Registry. It is unlawful to act as a mortgage loan originator without the endorsement, and section 10140.6 requires the unique identifier on first point of contact solicitation materials. No surrender of the broker license is required, no county registration exists, and individuals hold endorsements routinely.

Compared with a CLTA standard coverage policy, an ALTA extended coverage policy in California typically adds protection against:

• a.Liens recorded against the property after the policy date by the insured owner
• b.Losses caused by a future change in the zoning ordinance affecting the insured parcel
• c.A decline in the market value of the property during the buyer's period of ownership
• d.Rights of parties in possession and encroachments that an inspection would reveal✓

A CLTA standard policy insures matters of public record plus certain off-record risks such as forgery, lack of capacity and improper delivery. An ALTA extended policy adds an inspection and a survey and therefore reaches unrecorded risks a physical examination would disclose, including the rights of parties in possession, encroachments and unrecorded easements. Title insurance is not zoning insurance, and future government action is a standard exclusion. It does not insure market value. And it insures the state of title at the policy date, so liens the insured later creates are not covered.

A California preliminary report issued before closing is best described as:

• a.A survey of the property boundaries prepared by a licensed California land surveyor
• b.A binding warranty by the title company that title is free of the exceptions it lists
• c.An abstract of title summarizing every recorded instrument affecting the property
• d.An offer to issue a policy on stated terms, not a representation about the condition of title✓

A preliminary report is an offer to issue a policy of title insurance subject to the stated exceptions, exclusions and conditions. It is not a representation about the condition of title and cannot be relied on as one, which is why a buyer who wants a statement of title must ask for a condition of title report instead. It is not a warranty; the policy, once issued, is the contract of indemnity. An abstract of title is a separate historical summary prepared by an abstractor. And boundary work is the province of a licensed surveyor.

Which risk is covered by a standard California owner's title policy even though nothing about it appears in the public record?

• a.A forged deed in the chain of title that purported to convey the property✓
• b.An unrecorded easement being used openly by an adjoining property owner
• c.A boundary encroachment that a survey of the parcel would have revealed
• d.A mechanics lien for work the buyer orders after the close of escrow

Forgery is one of the classic off-record risks a standard policy insures, along with lack of capacity of a grantor, improper delivery and instruments executed under an expired power of attorney. Unrecorded easements in visible use and encroachments discoverable by survey are the very risks a standard policy excludes and an extended policy is bought to cover. And a lien arising from work the insured orders after the policy date concerns a later state of title, which no policy issued at closing insures.

Which element is NOT required for a valid California deed?

• a.The signature of the grantee accepting the conveyance✓
• b.A granting clause showing the grantor's intent to convey
• c.A description of the property sufficient to identify it
• d.Delivery of the executed instrument during the grantor's lifetime

A California deed must be in writing, identify a grantor with capacity and a grantee capable of holding title, contain words of grant, describe the property adequately, and be signed by the grantor and delivered and accepted. The grantee does not sign. Civil Code section 1054 makes delivery the moment the interest vests, so a deed found in a drawer after death conveys nothing. Consideration need not be recited, and recording is not required for validity, although an unrecorded deed leaves the grantee exposed to a later purchaser who records first.

Under Civil Code section 1113, the use of the word 'grant' in a California conveyance implies which covenants by the grantor?

• a.That the grantor will defend the title against every claim asserted by any person whatsoever
• b.That the grantor has not already conveyed the estate to anyone else✓
• c.That the improvements are free of construction defects and comply with the building code
• d.That the grantor holds marketable record title insurable by any California title company

Section 1113 implies two covenants and expressly says none other: that before executing the conveyance the grantor had not conveyed the same estate to anyone else, and that the estate is free from encumbrances done, made or suffered by the grantor or someone claiming under the grantor. A general warranty defending against all claims is the hallmark of a warranty deed used in other states; California relies on the grant deed plus title insurance. The section says nothing about physical condition or code compliance, and it does not warrant insurability.

A grantor signs a quitclaim deed to a parcel in which the grantor turns out to have held no interest at all. The grantee receives:

• a.Fee simple title, because a recorded deed is conclusive as to the interest it describes
• b.Nothing, because a quitclaim conveys only whatever interest the grantor actually had✓
• c.A life estate, because the deed operated on the grantor's possessory rights
• d.A claim against the grantor for breach of the implied covenants of a grant

A quitclaim deed releases whatever right, title or interest the grantor has, without any warranty that the grantor has any. If the grantor held nothing, the grantee takes nothing. Recording gives constructive notice and fixes priority but cannot manufacture an interest that never existed. No life estate arises from a deed that conveyed no estate. And the implied covenants of Civil Code section 1113 attach to the word grant, so a quitclaim carries them not at all, which is exactly why quitclaims are used to clear clouds rather than to convey marketable title.

Under Financial Code section 17006, a California real estate broker may perform escrow services without an escrow agent license when the broker:

• a.Charges no fee for the escrow work and completes fewer than twenty escrows each year
• b.Holds the funds in a separate account at a bank located outside the State of California
• c.Is acting as an agent or a party and performing acts requiring a real estate license✓
• d.Obtains the written consent of the Commissioner of Financial Protection and Innovation

Section 17006(a)(4) exempts a broker licensed by the Real Estate Commissioner while performing acts in the course of or incidental to a real estate transaction in which the broker is an agent or a party and is performing an act for which a real estate license is required. Subdivision (b) makes the exemption personal and forbids using it to run escrows for more than one business. The location of the bank is irrelevant. There is no fee-free or volume test in the exemption, although Business and Professions Code section 10141.6 requires a report once a broker reaches five escrows or a million dollars in a year.

Before the conditions of a California escrow have been satisfied, the escrow holder is best described as:

• a.A trustee for the listing broker, who is entitled to direct the disbursement of the commission
• b.The exclusive agent of the buyer, since the buyer's funds are on deposit in the escrow
• c.The exclusive agent of the lender, since the loan proceeds are the largest single deposit
• d.A limited dual agent of both parties, bound to follow their joint written instructions✓

Until the escrow conditions are performed, the escrow holder is a limited or dual agent of both parties, with authority strictly bounded by the escrow instructions; once the conditions are met, the escrow holder becomes the separate agent of each party as to the items each is entitled to receive. The holder is not the agent of the buyer alone, and the presence of loan funds does not make the holder the lender's agent. The listing broker is not a principal to the escrow, so the broker cannot unilaterally direct disbursement.

An escrow holder receives instructions from the buyer alone to release the deposit before closing. The escrow holder should:

• a.Decline, because the instructions can be changed only by mutual written agreement✓
• b.Comply, because the deposit belongs to the buyer until title has actually been transferred
• c.Comply, provided the listing broker approves the release in writing on behalf of the seller
• d.Interplead the funds with the county recorder pending a decision by the parties

Escrow instructions are the joint contract of the parties, and the escrow holder has no authority to act on a unilateral instruction; amendment requires the mutual written agreement of buyer and seller. Ownership of the deposit is precisely what is in dispute in such situations, so the buyer's claim to it does not settle the question. A broker is an agent, not a principal, and cannot supply the seller's consent to release. And where the parties genuinely deadlock, the remedy is an interpleader action in court, not a filing with the county recorder.

The county documentary transfer tax authorized by Revenue and Taxation Code section 11911 is imposed at the rate of:

• a.55 cents for each $100 of consideration, including any lien remaining at the time of sale
• b.55 cents for each $500 of consideration, exclusive of any lien remaining✓
• c.1 percent of the full purchase price, payable by the buyer at the time of recording
• d.2 percent of the assessed value shown on the most recent county property tax bill

Section 11911 lets a county impose a tax of 55 cents for each $500 of consideration or value, or fractional part of it, when the consideration exceeds $100, computed exclusive of the value of any lien or encumbrance remaining on the property at the time of sale. A city inside such a county may impose half that rate, with a credit against the county tax. The rate is per $500, not per $100. It is not a percentage of the full price, and it is not computed from the assessed value, which under Proposition 13 often bears little relation to the sale price.

Under Revenue and Taxation Code section 218, California's homeowners' property tax exemption reduces the assessed value of a qualifying owner-occupied dwelling by:

• a.$70,000 of full value, and it applies to every parcel the owner holds in the county
• b.$7,000 of full value, and it does not apply to a rental, vacant or vacation property✓
• c.2 percent of full value each year, compounding for as long as the owner remains
• d.Half of full value, matching the veterans' exemption available to eligible veterans

Section 218 sets the homeowners' exemption at $7,000 of the full value of the dwelling, and subdivision (b) withholds it from property that is rented, vacant, under construction on the lien date, or held as a vacation or secondary home, and from property receiving the veterans' exemption. The exemption is modest in dollar terms and is claimed on a single principal residence, not on every parcel owned. The 2 percent figure is the Proposition 13 cap on annual increases in assessed value, which is a different rule entirely.

A California owner transfers title but records nothing. A later buyer purchases the same property in good faith, pays value, has no notice of the earlier deed, and records first. Under Civil Code section 1214:

• a.Both take an undivided one-half interest as tenants in common by operation of law
• b.The earlier grantee prevails, because the first deed delivered is the first in right
• c.The later buyer prevails, because California follows a race-notice recording rule✓
• d.Neither prevails, and title reverts to the original grantor free of both conveyances

Section 1214 makes an unrecorded conveyance void as against a subsequent purchaser or mortgagee in good faith and for valuable consideration whose conveyance is first duly recorded. California is therefore a race-notice state: the later purchaser must both lack notice and record first, and here both conditions are met. Pure priority of delivery would be a race-nothing rule California does not follow. The statute allocates the whole estate rather than splitting it. And nothing in the statute revests title in the grantor.

A California owner records a deed conveying property to a named grantee, but the grantee is never told and the deed is retrieved from the recorder and destroyed. On these facts:

• a.The conveyance is conclusively valid, because recording is itself an irrebuttable act of delivery
• b.Delivery is presumed from recording, but the presumption can be rebutted by evidence of contrary intent✓
• c.The conveyance is void, because no California deed can be effective until the grantee signs it
• d.The conveyance takes effect only when the grantee later learns of it and pays consideration

Civil Code section 1054 makes delivery the operative act, and recording raises a rebuttable presumption that the grantor delivered the deed with the intent to pass title. Because it is a presumption, evidence that the grantor never intended a present transfer can overcome it. Recording is not conclusive. A grantee's signature is never required on a California deed. And while acceptance by the grantee is an element, acceptance is presumed when the conveyance is beneficial, and consideration is not required at all.

A probate sale of California real property is returned to court for confirmation at an original bid of $300,000. Under Probate Code section 10311, the minimum acceptable overbid at the hearing is:

• a.$345,000
• b.$330,000
• c.$310,000
• d.$315,500✓

Section 10311(a)(1) requires an overbid of at least 10 percent more on the first $10,000 of the original bid and 5 percent more on the amount above $10,000. Ten percent of $10,000 is $1,000, and 5 percent of the remaining $290,000 is $14,500, so the minimum overbid is $300,000 plus $15,500, or $315,500. Applying 10 percent to the whole bid gives $330,000, and applying 5 percent to the whole bid gives $315,000; $310,000 and $345,000 come from flat percentage guesses. The court then confirms to the highest qualifying offer, subject to its discretion to order a new sale.

Two joint tenants own a California property. One conveys an undivided half interest to a stranger. After the conveyance the parties hold as:

• a.Tenants in partnership, because two or more owners of an undivided interest form a partnership
• b.Joint tenants, because the survivorship right runs with the property rather than the owner
• c.Community property, because a transfer to a third party creates a statutory community
• d.Tenants in common, because the transfer severed the joint tenancy as to that interest✓

A joint tenancy depends on the four unities of time, title, interest and possession. A conveyance by one joint tenant destroys the unities of time and title as to the transferred share, so the transferee takes as a tenant in common with the remaining owner and the survivorship right is lost as between them. The right of survivorship does not run with the land. Community property is a form of ownership between spouses and cannot be created by a transfer to a stranger. And a tenancy in partnership requires an actual partnership holding the property for partnership purposes.

A California grant deed vests title in 'Ana Reyes and Luis Reyes, spouses, as community property with right of survivorship.' On the death of one spouse the property:

• a.Becomes the separate property of the decedent's estate until the probate court orders otherwise
• b.Passes half to the survivor and half through probate to the decedent's named beneficiaries
• c.Passes to the surviving spouse without administration, as provided by Civil Code section 682.1✓
• d.Must be sold and the proceeds divided equally between the survivor and the decedent's estate

Civil Code section 682.1 provides that community property expressly declared in the transfer document to be community property with right of survivorship passes to the surviving spouse on the death of the other without administration, subject to the same procedures as property held in joint tenancy. That is the vesting's whole purpose: it keeps the community property character while adding survivorship. Ordinary community property without that declaration would pass half by the decedent's will or by intestate succession, which is the outcome described in the second option.

Under Commissioner's Regulation 2832, when a California broker accepts trust funds on behalf of another, the broker must place them with the owner of the funds, in a neutral escrow depository, or in the broker's trust account:

• a.Not later than thirty calendar days following receipt of the funds
• b.Not later than three business days following receipt of the funds✓
• c.Not later than the recording of the deed at the close of escrow
• d.Not later than the last banking day of the calendar month of receipt

Regulation 2832(a) states that compliance with Business and Professions Code section 10145 requires the broker to place funds accepted on behalf of another into the hands of the owner of the funds, into a neutral escrow depository, or into a trust fund account not later than three business days following receipt by the broker or the broker's salesperson. Subdivision (e) shortens that to the next business day when the broker is acting as an escrow holder under the Financial Code exemption. Thirty days, close of escrow and month end would each leave client money unprotected far longer than the regulation permits.

California's trust fund rules prohibit commingling. Under Commissioner's Regulation 2835, which broker action is nonetheless permitted?

• a.Keeping up to $200 of the broker's own funds in the trust account to pay bank service charges✓
• b.Using one beneficiary's trust funds to cover a shortage owed to a different beneficiary
• c.Depositing a client's earnest money deposit into the broker's personal checking account
• d.Paying the broker's office rent and staff payroll directly out of the trust fund account

Regulation 2835 defines commingling for purposes of Business and Professions Code section 10176(e) and lists narrow exceptions. Subdivision (a) allows the deposit of reasonably sufficient funds of the broker, not to exceed $200, to pay service charges or fees levied against the account by the bank. Subdivision (b) allows funds belonging partly to the broker to remain if they are disbursed within twenty-five days and no dispute exists. Borrowing from one beneficiary to cover another is conversion, a personal account is not a trust account, and paying business expenses from trust funds is the classic violation the rule exists to stop.

Commissioner's Regulation 2831.2 requires a California broker to reconcile the separate beneficiary records with the record of all trust funds received and disbursed:

• a.At least once a year, when the broker's annual financial statement is prepared
• b.At least once a month, except in months when the bank account had no activity✓
• c.Only when the Department gives notice that it intends to audit the account
• d.Only when a beneficiary submits a written request for an accounting

Regulation 2831.2 requires the balance of all separate beneficiary or transaction records kept under Regulation 2831.1 to be reconciled with the record of all trust funds received and disbursed kept under Regulation 2831 at least once a month, except in those months when the bank account had no activity. A record of each reconciliation must be kept, identifying the bank account name and number, the date, and the trust fund liabilities to each principal. An annual review would let a shortage run undetected for months, and neither a Department audit notice nor a beneficiary request is the trigger the regulation sets.

Under Business and Professions Code section 10145 and Regulation 2834, an unlicensed employee of a California broker may be authorized in writing to sign trust account withdrawals if:

• a.The broker carries fidelity bond coverage equal to the trust funds the employee can reach✓
• b.The employee has completed a Department-approved course in trust fund accounting and handling
• c.The employee has worked for the broker continuously for at least twenty-four months
• d.Each withdrawal is countersigned by the beneficiary whose funds are being disbursed

Section 10145(a)(2)(C) and Regulation 2834(a)(3) permit an unlicensed employee to be a signatory if specifically authorized in writing by the broker and if the broker has fidelity bond or insurance coverage at least equal to the maximum amount of trust funds the employee can access at any time, with limits on deductibles and evidence of financial responsibility to cover them. A course, a tenure requirement and beneficiary countersignature are not what the statute demands. Section 10145(a)(3) adds that delegating signature authority never relieves the broker of responsibility for the funds.

Government Code section 12955, part of the Fair Employment and Housing Act, protects several bases that the federal Fair Housing Act does not name. Which of these is protected by the California statute?

• a.Source of income, and veteran or military status✓
• b.Number of years the applicant has lived in the state
• c.Credit score reported by a national consumer agency
• d.Length of the applicant's current employment history

Section 12955 lists race, color, religion, sex, gender, gender identity, gender expression, sexual orientation, marital status, national origin, ancestry, familial status, source of income, disability, veteran or military status and genetic information. Source of income and veteran or military status are among the bases California adds beyond the seven federal classes of race, color, religion, sex, national origin, familial status and disability. Residency duration, credit score and employment history are not protected characteristics, although using any of them as a pretext for a protected-basis decision would still violate the statute.

A California licensee tells a buyer that a neighborhood is 'changing' and urges an owner to sell before values fall because of the ethnic composition of arriving residents. Commissioner's Regulation 2781 identifies this as:

• a.A permitted market observation, provided the licensee cites published statistics
• b.Puffing, an expression of opinion that carries no regulatory consequence
• c.Panic selling, a distinct ground for disciplinary action against the licensee✓
• d.A violation only if the licensee obtains a listing as a result of the statement

Regulation 2781 makes panic selling, sometimes called blockbusting, a basis for discipline: inducing or attempting to induce a listing, sale or purchase by representations about the entry into the neighborhood of persons of a protected class. Business and Professions Code section 10177(l) reaches the same conduct where the pitch rests on loss of value, increase in crime or decline in school quality. Puffing is opinion about the merits of a property and does not shelter this. Statistics do not license the appeal, and the offense is complete on the attempt, whether or not a listing results.

A buyer asks a California licensee which neighborhoods have 'the right kind of families.' The licensee should:

• a.Decline to characterize neighborhoods by protected characteristics of the occupants✓
• b.Answer honestly from personal knowledge, since the buyer requested the information
• c.Show the buyer only the areas the licensee believes the buyer would find comfortable
• d.Refer the buyer to another licensee whose own background matches the buyer's request

Answering the question as asked would be steering, which Regulation 2780(b) lists as prohibited discriminatory conduct: channeling or steering any person away from real property because of a protected class or because of the composition of the occupants of an area. The client's request does not create an exception, and a licensee's private view of where a buyer would be comfortable is exactly the judgment the law removes from the licensee. Regulation 2780(e) also names referring prospects to other licensees because of the prospect's protected class as prohibited conduct.

A California landlord refuses to allow a tenant with a disability to install, at the tenant's expense, a grab bar in the bathroom. Under fair housing law this is:

• a.An unlawful refusal of a reasonable modification of the premises✓
• b.Lawful, because the landlord owns the fixtures attached to the unit
• c.Lawful, because the tenant did not first obtain a building permit
• d.Unlawful only if the building contains five or more dwelling units

Fair housing law distinguishes a reasonable accommodation, which is a change in rules, policies or services, from a reasonable modification, which is a physical change to the premises made at the tenant's expense. Refusing to permit a reasonable modification such as a grab bar is unlawful discrimination on the basis of disability. The landlord's ownership of the fixtures does not override the duty, though the landlord may in appropriate cases require restoration on move-out. Permit requirements are a matter between the tenant and the building department. And the duty does not turn on the size of the building.