Practice of Real Estate and Contracts
This chapter covers the day-to-day work of a California licensee: taking listings, writing enforceable contracts, handling other people's money without commingling it, managing property, and doing the arithmetic every deal requires. These are the rules that keep a licensee out of trouble with the DRE and the courts. Pay special attention to trust-fund handling and the statute of frauds, because mishandled money and unwritten agreements generate a large share of both exam questions and real-world discipline.
Listing Agreements
A listing agreement is the employment contract between a seller and a broker that creates the agency relationship and defines how the broker earns a commission. Because it is a contract to pay a commission on the sale of real estate, California's statute of frauds requires it to be in writing and signed by the seller to be enforceable. The exam expects you to distinguish the main types by how the broker gets paid. An exclusive right to sell listing gives one broker the sole right to earn the commission if the property sells during the listing term, no matter who finds the buyer — even if the seller finds the buyer personally. This offers the broker the greatest protection and is the most common form. An exclusive agency listing also appoints one broker, but the seller reserves the right to sell the property themselves without owing a commission; the broker earns a fee only if the broker or another agent procures the buyer. An open listing is nonexclusive: the seller may give open listings to several brokers, and only the broker who actually procures the ready, willing, and able buyer earns a commission. If the seller sells it themselves, no one is paid. A net listing is defined by how the commission is calculated rather than by exclusivity: the seller states a net amount they must receive, and the broker keeps everything above that figure as commission. Net listings invite abuse — an agent could conceal the property's true value to inflate their own take — so California permits them only with full disclosure to the seller of the selling price and the resulting commission before the seller is bound. Every listing should also state a definite termination date; a listing with no fixed expiration is a red flag and, for exclusive listings, a violation. Commission rates are always negotiable between seller and broker and are never set by law or by agreement among competitors.
Contracts and Purchase Agreements
Contract law underlies every transaction, and the salesperson exam tests the essential elements of a valid contract and the special rules for real estate. A valid contract requires four elements: capable (competent) parties, mutual consent (offer and acceptance, a "meeting of the minds" free of fraud or duress), a lawful object, and sufficient consideration — something of value exchanged. A minor or a person lacking mental capacity generally cannot form a binding contract; a contract with an unlawful purpose is void. The statute of frauds requires that contracts for the sale of real property, and certain long-term leases, be in writing and signed by the party to be charged (the party against whom enforcement is sought). An oral agreement to sell land is generally unenforceable, which is why the written purchase agreement is the heart of a residential deal. Contracts are also classified as express or implied, bilateral (a promise for a promise) or unilateral (a promise for an act), and executory (not yet fully performed) or executed (completed). Offer and acceptance follow precise rules. An offer may be revoked any time before it is accepted. A counteroffer is a rejection of the original offer and simultaneously a new offer, which the original offeror may then accept or reject; the original offer is dead once countered. Acceptance must be communicated to be effective. An option is a distinct contract in which an optionor, for consideration, gives the optionee the right — but not the obligation — to buy on set terms within a stated time; the optionee may walk away and lose only the option money. When a contract is breached, remedies include damages, rescission (cancellation restoring the parties to their original positions), and, because each parcel of land is considered unique, specific performance — a court order compelling the sale to close. Many California purchase agreements also contain a liquidated-damages clause capping the seller's recovery at the buyer's deposit, subject to statutory limits for residential property.
Trust Funds and Ethics
Handling other people's money correctly is one of the most heavily disciplined areas of California real estate practice, and it is a reliable source of exam questions. Trust funds are money or things of value — earnest-money deposits, rents, security deposits — that a licensee receives on behalf of a principal and does not own. The licensee holds them in trust and must account for every dollar. The timing rule is precise. A broker who receives trust funds must place them into a neutral escrow depository, into the broker's trust fund bank account, or into the hands of the principal, not later than three business days after receipt — unless the buyer's written instructions direct that a check be held uncashed until acceptance. A salesperson who receives trust funds must deliver them to their employing broker (or as the broker directs) immediately. The broker's trust account must be a non-interest-bearing account in the broker's name as trustee, separate from the broker's own funds, and reconciled regularly. Commingling — mixing client trust funds with the broker's personal or business funds — is a serious violation even if no client loses money. Worse is conversion: actually using client trust funds for the broker's own purposes. Both are grounds for license suspension or revocation. The rule against commingling is strict; a broker may keep only a small amount of personal money in the trust account to cover bank service charges, within the limit the DRE allows. Ethics extend beyond money. Licensees must deal honestly and fairly with everyone in the transaction, clients and customers alike. Making false statements about a competing listing, disparaging another agent's property to steer a buyer, or misrepresenting a material fact is unethical and may be fraudulent. Secret profits, undisclosed dual agency, and self-dealing all breach the duty of loyalty. When in doubt, disclose in writing, keep client money separate and accounted for, and put the principal's interest first.
Property Management
Property management and leasing are licensed activities, and California landlord-tenant law adds a layer of rules that a salesperson must know. Leasing property, collecting rents, and managing real estate for others for compensation are acts requiring a real estate license, so a professional property manager generally must be a licensee or must work under a broker. There are limited exceptions, such as a resident manager of an apartment building employed by the owner. The relationship should rest on a written property management agreement that defines the manager's authority, duties, compensation, and the term. A property manager owes the owner the same fiduciary duties as any agent — loyalty, accounting, disclosure, and care — and must deposit rents and deposits into a trust account, not commingle them. California security-deposit law is strict and frequently tested. All residential security deposits must be refundable; nonrefundable deposits and nonrefundable "cleaning fees" are prohibited. The total deposit a landlord may collect is capped by statute, and because the cap has changed in recent years, verify the current limit and any exceptions with California law. After a tenant moves out, the landlord must return the deposit, less lawful deductions for unpaid rent, cleaning to the condition at move-in, and repair of damage beyond ordinary wear and tear, within the statutory period (commonly 21 days), together with an itemized statement. Other landlord-tenant rules govern the relationship. The implied warranty of habitability requires the landlord to maintain the premises in a livable condition. Entry by the landlord generally requires advance written notice except in emergencies. Terminating a tenancy requires proper statutory notice, and California's just-cause and rent-cap statutes limit rent increases and no-fault evictions for many properties — rules that change and vary by locality, so always verify current state and local ordinances. Fair-housing law applies fully to rentals, including reasonable accommodations for disabilities.
Real Estate Math
Roughly one in ten questions on the exam involves arithmetic, and the same handful of formulas recurs. Approach every problem by identifying what is asked, writing the formula, and checking that percentages are taken on the correct base. Commission is the classic calculation: Commission = Sale Price × Commission Rate. On a $500,000 sale at a 6% total rate, the commission is 500,000 × 0.06 = $30,000. That gross is then split — first between the listing and selling brokerages, then between each broker and their salesperson — according to their agreements. If the listing and selling sides split the $30,000 evenly, each brokerage receives $15,000; if the salesperson's split with their broker is 60/40, the salesperson earns 15,000 × 0.60 = $9,000. Read carefully which split a question wants. Proration divides shared, ongoing expenses — property taxes, HOA dues, prepaid rent, insurance — between buyer and seller as of the closing date, so each pays only for the period they own the property. Many California problems use a 360-day banker's year (a 30-day month) unless told otherwise. To prorate, find the daily amount (annual amount ÷ 360, or ÷ the actual days) and multiply by the number of days each party owns. The seller is typically charged for the day of closing in California, but always follow the instruction given. Area and measurement questions rely on fixed facts: the area of a rectangle is length × width; one acre equals 43,560 square feet; and a section of land is one square mile, or 640 acres. To find lot value per square foot, divide price by area. Profit-and-loss and appreciation questions calculate the percentage on the original cost or basis, not the new price: if a property bought for $400,000 sells for $500,000, the gain is $100,000, and the percentage gain is 100,000 ÷ 400,000 = 25%. Setting up the base correctly is where most points are won or lost.
Last updated: September 2026
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