Real Estate Practice Exam 5 — Questions and Answers

Question 1: A prospect enters Broker A's office and requests to be shown houses in neighborhoods with certain racial characteristics. The broker advises the prospect that he will show him houses without regard to the racial characteristics of the neighborhood. The prospect is shown houses in certain minority neighborhoods and certain non-minority neighborhoods. The prospect becomes interested in two of the houses, both of which are in minority neighborhoods. If the broker had followed the prospect's initial instructions, which of the following would be correct?

He would have violated federal laws but not the Florida real estate license law.
He violated Federal and State law and could have been suspended or revoked. (Correct answer)
He would not have violated any laws; he must follow his principal's instructions.
He would not have violated any laws; he must follow his prospect's instructions.

Correct answer: He violated Federal and State law and could have been suspended or revoked.

A broker who follows a prospect's discriminatory instructions to show houses only in neighborhoods with certain racial characteristics would be engaging in steering, which is a violation of both federal Fair Housing laws and state real estate license laws. Such actions can lead to severe penalties, including license suspension or revocation, as brokers have an ethical and legal duty to uphold fair housing principles.

Question 2: Which is deducted from gross income to arrive at net operating income?

taxes
insurance (Correct answer)
vacancy
debt service

Correct answer: insurance

Net Operating Income (NOI) is calculated by taking the gross income, subtracting vacancy and collection losses, and then subtracting all operating expenses. Insurance is a common operating expense, along with utilities, property taxes, and management fees, and is therefore deducted to arrive at NOI. Debt service (mortgage payments) is not considered an operating expense.

Question 3: A reasonably good balance between supply and demand of apartments is

5% occupancy.
90% vacancy.
95% occupancy. (Correct answer)
87% occupancy.

Correct answer: 95% occupancy.

A reasonably good balance between the supply and demand of apartments is generally considered to be around 95% occupancy. This 5% vacancy rate allows for a healthy market where landlords can fill vacancies without excessive competition, while also providing enough available units for renters and facilitating tenant turnover.

Question 4: The Fair Housing Act of 1968 (with amendments) prohibits discrimination

on the basis of age.
on the basis of a couple having children. (Correct answer)
on the basis of behavioral characteristics.
all of the above

Correct answer: on the basis of a couple having children.

The Fair Housing Act, as amended, prohibits discrimination based on race, color, religion, sex, national origin, disability, and familial status. Familial status specifically protects families with children under 18, pregnant women, and people in the process of securing custody of children, making discrimination against a couple having children illegal.

Question 5: What requires lenders to give a Good-Faith Estimate?

the "Little FTC" consumer protection act.
Regulation Z.
RESPA. (Correct answer)
FHLBB consumer protection statutes.

Correct answer: RESPA.

The Real Estate Settlement Procedures Act (RESPA) is a federal law designed to protect consumers by requiring lenders to provide disclosures about the costs of a mortgage loan. One key requirement is the provision of a Good-Faith Estimate (GFE) of settlement costs to borrowers within three business days of a loan application.

Question 6: Which is correct about Regulation Z?

It is published by the Federal National Mortgage Association
It requires the disclosure of pertinent information such as down payment and annual percentage rate if a "triggering" item such as interest rate is advertised (Correct answer)
It requires disclosure of estimate of settlement costs by the lender
all of the above

Correct answer: It requires the disclosure of pertinent information such as down payment and annual percentage rate if a "triggering" item such as interest rate is advertised

Regulation Z, which implements the Truth in Lending Act (TILA), requires lenders to disclose all costs of financing a loan. If certain 'triggering terms' (like the interest rate or down payment) are used in advertising, Regulation Z mandates the disclosure of additional pertinent information, such as the annual percentage rate (APR) and other specific loan terms, to prevent misleading consumers.

Question 7: Marilyn is applying for a loan to finance her new home in an area where there are minorities. The loan officer tells her that she should try to find another location, since the loan committee would prefer not to lend in that area. The lender may be involved in the illegal practice called

blockbusting.
redlining. (Correct answer)
steering.
failure to disclose under RESPa.

Correct answer: redlining.

Redlining is the illegal practice where lenders refuse to make loans or impose stricter terms in certain geographic areas, often based on the racial or ethnic composition of the neighborhood, regardless of the applicant's creditworthiness. This discriminatory practice limits housing opportunities for residents in those areas and is a violation of fair housing laws.

Question 8: Which may be deducted for income tax purposes by a homeowner?

property taxes, insurance and interest
insurance, depreciation and taxes
depreciation, taxes and interest
taxes and interest (Correct answer)

Correct answer: taxes and interest

For income tax purposes, homeowners can typically deduct the interest paid on their mortgage and the property taxes assessed on their home. Other expenses like homeowner's insurance premiums, depreciation (for a primary residence), and principal payments are generally not deductible.

Question 9: Usually, local planning commissions are composed of

lay members representing a cross section of the community. (Correct answer)
professionals from each of the local planning authorities.
three county commissioners and two school board members.
local developers and representatives of utilities and banks.

Correct answer: lay members representing a cross section of the community.

Local planning commissions are typically composed of volunteer lay members from the community, rather than paid professionals or elected officials. These members are appointed to represent a cross-section of the community, providing diverse perspectives on land-use planning, zoning, and development decisions.

Question 10: Fred has a long-term capital loss on the sale of his personal residence. He may deduct

a maximum of 28% of the loss
a maximum of $3,000 each year until the loss has been deducted
the entire loss
none of the loss (Correct answer)

Correct answer: none of the loss

Losses from the sale of a personal residence are generally not tax-deductible. The IRS considers a personal residence a personal asset, not an investment property, so any capital loss incurred cannot be used to offset other income or capital gains. This rule applies regardless of the amount of the loss.

Question 11: A comparable property sold a year ago for $70,000, but would have sold for about eight percent more today. The appraiser should:

adjust the subject price upward by $5,600
adjust the subject price downward by $5,600
adjust the comparable price upward by $5,600 (Correct answer)
adjust the comparable price downward by $5,600

Correct answer: adjust the comparable price upward by $5,600

In the sales comparison approach, adjustments are always made to the comparable property, not the subject property. Since the comparable property sold a year ago for less than its current value due to appreciation, its price must be adjusted upwards. This $5,600 adjustment ($70,000 * 0.08) brings the comparable's past sale price to reflect current market conditions, making it more comparable to the subject property.

Question 12: A small apartment property is estimated to have potential gross income of $ 25,000. Vacancy and collection losses are expected to average 5 percent over the life of the property. Operating expenses are expected to average about 30 percent of effective gross income. An overall capitalization rate of 12 percent is derived from market transactions of similar properties. What is the market value?

$208,333
$138,542 (Correct answer)
$197,917
$145,833

Correct answer: $138,542

First, calculate the Effective Gross Income (EGI) by subtracting vacancy losses: $25,000 * (1 - 0.05) = $23,750. Next, determine the Net Operating Income (NOI) by subtracting operating expenses from EGI: $23,750 * (1 - 0.30) = $16,625. Finally, divide the NOI by the capitalization rate to find the market value: $16,625 / 0.12 = $138,541.67, which rounds to $138,542.

Question 13: . A 3-year insurance policy costing $1,164 is taken out November 1, 1995. The property was sold on May 15, 1996, and the day of closing belongs to the buyer. If the buyer assumes the policy, what the should the buyer pay the seller at closing, using the 30-day month method?

$179.97
$955.99
$954.91 (Correct answer)
$977.97

Correct answer: $954.91

The policy costs $1,164 for 3 years (36 months), so the monthly cost is $1,164 / 36 = $32.333. The seller used the policy from November 1, 1995, to May 15, 1996, which is 6 full months (Nov-Apr) and 15 days in May. Using the 30-day month method, the seller used 6 * 30 + 15 = 195 days. The total policy duration is 36 * 30 = 1080 days. The unused portion is 1080 - 195 = 885 days, so the buyer pays for (885 / 1080) * $1,164 = $954.91.

Question 14: An appraiser values a 4-bedroom home with a pool. A pool normally adds $14,000 value to a property, and a bedroom is worth $9,000. She locates the following comparable sales: 5 bedroom home, no pool, sold for $125,000 4 bedroom home, no pool, sold for $116,000 3 bedroom home with pool, sold for $121,000 What is the value of the subject property?

$120,000
$125,000
$130,000 (Correct answer)
$135,000

Correct answer: $130,000

To find the subject property's value, use the most similar comparable and adjust for differences. The 4-bedroom home with no pool sold for $116,000. Since the subject property has a pool, which adds $14,000 in value, you add this amount to the comparable's price. Therefore, $116,000 (comparable) + $14,000 (pool adjustment) = $130,000, which is the estimated value of the subject property.

Question 15: A buyer purchases a 4-unit commercial building for $150,000 cash. Operating expenses of the building total $30,000 annually. What must the buyer get in monthly rent from each unit in order to achieve a 20% return?

$5,000
$2,500
$1,250 (Correct answer)
$125

Correct answer: $1,250

To achieve a 20% return on a $150,000 investment, the desired annual net income is $150,000 * 0.20 = $30,000. Since annual operating expenses are also $30,000, the total annual gross income needed is $30,000 (net income) + $30,000 (expenses) = $60,000. For a 4-unit building, the annual rent per unit is $60,000 / 4 = $15,000. Dividing this by 12 months gives a monthly rent per unit of $15,000 / 12 = $1,250.

Question 16: A building rents for $5 per square foot, and there is an index of 1.5. The following year the index climbs to 1.8. The rent is tied to the index. What will the rent be per square foot?

$5.68
$6.00 (Correct answer)
$8.00
$5.45

Correct answer: $6.00

First, determine the current rent per index point by dividing the current rent by the current index: $5 / 1.5 = $3.333 per index point. Then, multiply this rate by the new index to find the new rent. So, $3.333 * 1.8 = $6.00 per square foot. This calculation ensures the rent adjusts proportionally to the change in the index.

Question 17: A comparable property showed adjusted value of $40,000. The property sold two years ago, and the adjustments indicated a 7% annual appreciation rate. Assuming the appreciation was the only adjustment, how much was the total adjustment?

plus $5,063 (Correct answer)
plus $5,404
minus $5,063
plus $5,600

Correct answer: plus $5,063

The comparable property's *adjusted* value today is $40,000. Since it appreciated at 7% annually for two years, its original sale price was lower. To find the original price, divide the current value by (1 + appreciation rate)^number of years: $40,000 / (1.07 * 1.07) = $40,000 / 1.1449 = $34,937.55. The total adjustment is the difference between the adjusted value and the original sale price: $40,000 - $34,937.55 = $5,062.45, which rounds to a positive adjustment of $5,063.

Question 18: A home is 10 years old. It has a 50-year life, and a $100,000 reproduction cost. The appraiser assigns physical deterioration of $26,000. Which is probably correct?

The home has been better maintained than others in the area
The home probably has a swimming pool, or is next to a convenience store
The home has been poorly maintained (Correct answer)
The appraiser is wrong

Correct answer: The home has been poorly maintained

A 10-year-old home with a 50-year life would typically have 20% (10/50) physical deterioration if maintained adequately, equating to $20,000 ($100,000 * 0.20). Since the appraiser assigned $26,000, which is higher than the expected amount, it indicates that the home has suffered more wear and tear than average for its age. This suggests that the home has been poorly maintained, leading to accelerated physical deterioration.

Question 19: John takes out a 14% 30-year mortgage in the amount of $65,000. The loan constant is .011849. What is the balance of the loan after the second payment?

$64,976.14 (Correct answer)
$64,988.14
$64,964.00
$1,516.52

Correct answer: $64,976.14

First, calculate the monthly payment: $65,000 * 0.011849 = $770.185. For the first payment, interest is $65,000 * (0.14 / 12) = $758.33, so principal paid is $770.185 - $758.33 = $11.855. The balance is $65,000 - $11.855 = $64,988.145. For the second payment, interest is $64,988.145 * (0.14 / 12) = $758.20, so principal paid is $770.185 - $758.20 = $11.985. The balance after the second payment is $64,988.145 - $11.985 = $64,976.16, which is closest to $64,976.14.

Question 20: A seller receives $18,000 proceeds from the sale of her home. The mortgage balance was $32,000, she paid a commission of 7%, and her closing costs were 3%. What was the sales price?

$55,555 (Correct answer)
$50,000
$55,000
$56,000

Correct answer: $55,555

Let the sales price be X. The seller's proceeds ($18,000) are calculated as: Sales Price - Mortgage Balance - Commission - Closing Costs. So, $18,000 = X - $32,000 - (0.07X) - (0.03X). Combine the percentage costs: $18,000 = X - $32,000 - 0.10X. Rearrange the equation: $18,000 + $32,000 = X - 0.10X, which simplifies to $50,000 = 0.90X. Therefore, X = $50,000 / 0.90 = $55,555.55, rounding to $55,555.

Real Estate Practice Exam 5

A prospect enters Broker A's office and requests to be shown houses in neighborhoods with certain racial characteristics.
The broker advises the prospect that he will show him houses without regard to the racial characteristics of the neighborhood.
The prospect is shown houses in certain minority neighborhoods and certain non-minority neighborhoods.
The prospect becomes interested in two of the houses, both of which are in minority neighborhoods.
If the broker had followed the prospect's initial instructions, which of the following would be correct?