Practice Exam

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Question 1

Which of the following Real Estate Investment Trusts focus on lending money for mortgages and
investing in mortgage-backed securities?

Equity REIT

Investment REIT

Mortgage REIT

Security REIT

Mortgage REITs lend money for mortgages and make investments in mortgage-backed securities.

Question 2

Which of the following is a potential ramification to the seller if a short sale is completed?

A short sale can negatively impact the seller's credit, and the lender may seek a
deficiency judgment for the amount not repaid.
 Completing a short sale means the seller will never again be legally allowed to own
property.

Not all states have ramifications for short sales, so it depends on which state the
seller lives in.

There are no ramifications. Short sales are just a quicker way to get a property sold.

Short sales can negatively impact the seller's credit. It's an alternative to foreclosure, but the borrower
may still be liable for the amount not paid if the lender seeks a deficiency judgment.

Question 3

Which of the following is a true statement about when a promissory note is sold?

Promissory notes cannot be sold.

The note must be notarized.

The promissory note is endorsed to the new owner of the loan.

When the note is sold, the attached security instrument is assigned to the lender.

When a note is sold, the promissory note is endorsed to the new owner of the loan.

Question 4

What's the motive of joint venture participants?

Altruism

Corporate shield
 Profit

Tax shelter

A joint venture is established for making a profit.

Question 5

Craig's loan is secured by a mortgage. Who holds legal title when this security instrument is used?

A third-party trustee

Craig

Craig's lender

The seller

The borrower holds legal title to the property that secures the loan when a mortgage instrument is
used.

Question 6

Life insurance companies sometimes like to insure their investment in commercial projects by insisting
on an equity position. This is known as ______ financing.

Equity-based

Greedy

Interim

Participation
Participation financing means the lender becomes a participant in the deal in exchange for some
equity. This offers added security for the investment.

Question 7

Which of the following statements about topography in land investments is true?

Contours impact development costs, but soil composition doesn't.

Physical features of the land factor into development costs.

Physical features of the land have little to no impact on development costs.

The impact of physical features to development costs must be considered when

looking at agriculture properties, but not for commercial properties.

Physical features of the land, such as contours, soil composition, and drainage, all factor in to
development costs.

Question 8

What percentage of a neighborhood shopping center's gross leasable space does the major tenant
lease?

10 to 30

20 to 40

30 to 50

40 to 60

Typically, a neighborhood shopping center has one major tenant that leases approximately 30% to
50% of the center's gross leasable space.
Question 9

Why might a person opt to be a general partner rather than a limited partner in a real estate venture?

Wants greater tax shelters

Wants less liability

Wants to be hands-off

Wants to be hands-on

The person wants to be hands-on. General partners have more liability and authority than do limited
partners.

Question 10

Joey wants to invest in a regional shopping center. What size trade area can he plan to service?

Five to 15 miles

Four to 20 miles

Three to 25 miles

Two to 10 miles

A regional shopping center typically serves a trade area of five to 15 miles. This type of shopping
center is usually built on 40 to 100 acres.

Question 11
Property manager Alexandra wants to ensure she gets everything she needs from the property owner
when she begins to manage the property. What's the best way to do this?

Ask the office manager.

Just do her best. She's not going anywhere so if she misses something she can get is
as needed.

Let the owner decide what he thinks she should have.

Use a takeover checklist.

A lot of money and responsibilities change hands in a property management takeover, so Alexandra
should use a checklist to make sure she gets everything she needs as soon as she takes over.

Question 12

The Siegels are purchasing a commercial investment property and plan to use straight-line
depreciation on their financial statements and tax calculations. Which of the following would NOT be
included in the Siegels' depreciation basis calculations?

The cost of the electrical system upgrades they did after purchase

The cost of the title insurance for the property

The loan origination and lender fees that they paid at closing

The price that they paid for the property, minus any land costs

The depreciable basis is made up of the sales price plus any acquisition costs, such as title insurance,
and capital improvements. Loan costs aren't included in the basis, but something like electrical system
upgrades are capital improvements.

Question 13
In order to promote tenant retention, Misty always tries to be ______.

Absent

As hands-off as possible

A visible presence

Invisible

Property managers should check in from time to time.

Question 14

Which of the following is one reason for the popularity of commercial leasing?

Business owners can often make more money on their business than they can on the
appreciation of the building where they conduct that business.

Rental rates can include annual escalations based on market conditions.

The landlord holds the right of reversion at lease end. Tenants may be required to
move at the end of the lease.

There can be many obligations and hidden costs in a lease, which can be onerous for
tenants if they aren't aware of them.

One reason for the popularity of commercial leasing is that business owners can often make more
money on their business than they can on the appreciation of the building where they conduct that
business.

Question 15
Your client hates the fact that out of her $1,027 monthly payment, more than $900 is going toward
interest. What do you tell her?

"That's amortization for you."

"That's highway robbery! Who's your lender?"

"There must be some mistake."

"You should refinance."

That's how amortization works: A larger percentage of each monthly payment is applied toward
interest in the beginning, with the principal being paid off in increasing amounts over time.

Question 16

Which of the following is true regarding the federal gift tax?

It applies even if the donor didn't intend it to be a gift.

It only applies when gifts are monetary in nature.

Provided some value was received in return, even if not full value, the gift is not
subject to a gift tax.

There are no exemptions to gift taxes.

The gift subject to a gift tax may be in the form of money, real estate or other item of value. A gift tax
applies whether the donor intended the transfer to be a gift or not.

Question 17

Which of the following analyzes net operating income (NOI) for a single year, and is used when the
property's income isn't expected to vary much over time?
 Annuity capitalization

Direct capitalization

Discounted cash flow analysis

Yield capitalization

The direct capitalization method converts a single year's expected income (or an annual average) into
a market value. This is the expected return on investment the property is capable of producing in a
single year: the first year of ownership.

Question 18

Which of the following does the use provision in a lease describe?

How the tenant will pay the rent

How the tenant will use the property, including allowable activities

The term of the lease

Whether the lease is automatically renewable

The use provision describes how the tenant will use the property, including allowable activities.

Question 19

Price levels are an indicator of _______.

Demand

Inventory rates
 New building permits

Supply

Demand and price move together in the marketplace, so price levels are good indicators of demand.

Question 20

Which document details the duties of the condominium board and the scope of its power?

Bylaws

Declaration

Governorship plan

Offering plan

This information is provided in the condominium bylaws.

Question 21

Charlie is monitoring market indicators in a particular area for her client, who wants to buy an
oceanfront home. Which market indicator will tell her how much prices have fluctuated in the area over
the past two years?

Inventory rates

New building permits

Price levels
 Sales volume

Price levels provide this information. It's important, when using price levels as a market indicator, to
look at price levels within a given market, and not the market as a whole.

Question 22

Quentin is a victim of fair housing discrimination who is seeking redress in federal court. What is the
limit on the amount of punitive damages he may be awarded?

$16,000

$37,500

$65,000

There is no limit

In federal court, there is no limit to the amount of punitive damages that may be awarded to a victim of
fair housing discrimination. The court may also issue injunctions.

Question 23

The property management agreement cements what relationship between the property manager and
the owner?

The agency relationship

The landlord-tenant relationship

The owner relationship

The service relationship

Like other agency agreements, the property management agreement details the terms of
"employment" between the property manager (agent) and the owner (client).

Question 24

Return on investment is another name for what?

Capitalization rate

Capital recapture

Dividends

The profit made from an investment

Return on investment is the profit made from an investment, and is often referred to as ROI. It's
usually expressed as an interest rate or discount rate.

Question 25

Which of the following is a disadvantage of investing in residential real estate, including a single-family
home rentals?

Ability to depreciate an appreciating asset

Landlord responsibilities and tenant relationships

No periods of vacancy

Positive cash flow

Having to maintain a property and address all of the issues, as well as having to collect rent from
tenants who are behind in their payments or evicting tenants who have not paid their rent, are some of
the disadvantages of single-family home rentals.
Question 26

Investors can determine the relative strength of the job market by evaluating the _____________.

Employment rate

Gross domestic product

Number of homes on the market

Types of businesses in the area

The employment rate is often evaluated for previous years and projected into the future by also
considering the prominent industries in the market area.

Question 27

Under a sole proprietorship form of business, ______.

The owner assumes personal liability for all debts

The owner is subject to double taxation

The owner's personal assets are protected from business creditors' claims

The owner works alone, without employees

Remember, a sole proprietorship exists when a single individual operates a business.

Question 28

What tax advantage does a limited liability company have?

 It combines pass-through taxation of partnerships with the limited liability of
corporations.

It reduces taxes when hiring minorities.

Limited income potential means lower taxes.

There are no tax advantages, only reduced liability.

Limited liability companies have the pass-through advantages of sole proprietors or partnerships, and
also offer the liability shield enjoyed by corporations.

Question 29

Construction loans are a type of ______ financing.

Immediate

In-between

Interim

Intermediary

Construction projects need short-term financing to complete the job, which is known as interim
financing.

Question 30

What happens at the end of the term established for a grantor retained income trust?

It passes through probate.

 It's automatically extended for period not to exceed 10 years.

It's fully taxable.

It vests to the beneficiary.

At the end of the term, all trust proceeds go to the beneficiary.

Question 31

With an interest-only loan, what happens after the specific period of time that interest-only payments
are made is over?

The debt is paid.

The full principal of the loan is due.

The loan is converted.

The loan is sold to another lender.

With an interest-only payment, the periodic payments of interest only last for a few years. When the
loan term is over, the borrower has to repay the entire principal. This is known as a lump sum
payment. This lump sum payment is usually accomplished through refinancing the loan.

Question 32

What phrase describes the amount that today's dollars grows to over time?

An investment

Future value
 Present value

Principal

Present value describes today's dollars. Future value describes the value of those dollars over time, at
some point in the future. Present and future value are concepts related to the time value of money.

Question 33

Landlords may protect themselves from having to pay for damages to the property caused by the
tenant by collecting a security ______ from the tenant.

Charge

Deposit

Guarantee

Payment

The money a landlord may collect toward future damages or default on rent is called a security deposit.

Question 34

Adjustable rate mortgage interest rates are often linked with a recognized ______.

Bank

Government entity

Index

Public figure
ARM interest rates are often linked with a recognized index, such as U.S. Treasury securities.

Question 35

Gabi's been researching commercial property in her area and has decided to invest in a retail space
that, although located outside the main shopping area, will offer shoppers a wide variety of name
brand goods at discount prices. What type of retail space is Gabi contemplating?

Factory outlet

Mall

Neighborhood center

Strip mall

Traditionally, factory outlets are located outside main shopping areas. Although shoppers have to drive
a bit to get to the outlets, they're rewarded with brand name goods at a discount.

Question 36

Property A is in a highly appreciating area. Property B was assessed identically to Property A five
years ago but has lost value. Without periodic reassessments, which of the following is true?

Property A and B would pay the same property taxes

Property A would be paying too much.

Property A would be paying too much, and Property B would be paying too little.

Property B would be paying too little

Without reassessment, the property bills would remain the same.

Question 37

Which paragraph in a sales contract puts the parties on notice that they are individually and jointly
responsible for fulfilling the terms of the contract?

Addenda

Notices

Possession of Property

Responsibility and Non-assignability

The Responsibility and Non-assignability paragraph puts the parties on notice that they are individually
and jointly responsible for fulfilling the terms of the contract.

Question 38

Jeannie is an investor interested in purchasing a warehouse. Two properties on opposite ends of town
are fairly comparable in terms of price and features. Which of the following is a true statement?

Even though the properties are similar in price and features, the property taxes for the
properties could vary a lot.

Jeannie doesn't need to be concerned about property tax rates.

Jeannie won't be able to deduct the property expense on an investment property.

Since the properties are both similar in price and features, property taxes for both
should be roughly the same.

Property taxes are deductible for investment purposes, but rates vary from area to area and the
difference can make or break an investment.
Question 39

Steven put down $10,000 toward a property's purchase price, financed the rest, and now has a cash
flow of $2,800 after repairs and debt service. What's his ROI?

21%

26%

28%

32%

Return on investment or ROI = cash flow ÷ cash investment. $2,800 ÷ $10,000 = 28%.

Question 40

All trusts have three parties: the trustor, the trustee, and the ______.

Attorney in fact

Beneficiary

Broker

Founder

The parties to a trust include the trust creator (commonly called the trustor), the trustee (the person in
charge of carrying out the terms of the trust), and the beneficiary (the person who receives the benefits
of the trust).

Question 41
Marcy wants to collect economic data about businesses and local growth and decline. Where can she
go to find this data?

Internet

Local chamber of commerce

Local historical society

Public library

The local chamber of commerce will have this economic data.

Question 42

The element of a deed that signifies the grantor's intention to transfer title to the grantee is the ______.

Act of conveyance

Consideration

Evidence of title

Transference clause

This is the act of conveyance, which "conveys" the intention to transfer title.

Question 43

Which of the following is considered a plex?

A building with two dwelling units

 A condo

An apartment building

A townhome

A duplex has two dwelling units.

Question 44

How many years of income does yield capitalization analyze?

At least 50

One

Several

Two

Direct capitalization analyzes a single year of income, while yield capitalization analyzes cash flows for
multiple future years.

Question 45

Which of the following statements best describes the 95% rule as it relates to tax-deferred exchanges?

The combined fair market value of the property (or properties) selected as exchanges
can't be more than 95% of the relinquished property.

The fair market value of the relinquished property must be 95% more than the
property (or properties) selected as exchanges.
 The total value of the property being sold must be at least 95% of the value of the
profit to be made on the property (or properties) selected as exchanges.

The total value of the property (or properties) selected as exchanges must be at least
95% of the value of the property being sold.

The 95% rule says that an investor can identify multiple properties with no regard to their value if the
exchange they're moving into has a total value of at least 95% of the value of the property they're
selling.

Question 46

Which of these is a dynamic risk?

An accident involving a company delivery driver

Fire damaging the building

Market change

Theft of business equipment

Dynamic risks are those business risks that cannot be lessened with insurance. This includes
economic, tax, and market changes.

Question 47

Which alternative to foreclosure is being utilized when a lender creates a schedule for the borrower to
catch up on delinquent mortgage payments?

Bankruptcy

Repayment plan
 Short sale

Voluntary conveyance of deed

If borrowers are able to arrange a repayment plan with their lender, it may be possible to avoid
foreclosure by catching up on delinquent payments.

Question 48

Many savings institutions remain local or regional with their physical operations. How do they reach a
larger area to keep their institutions financially sound?

By offering Internet banking

By participating in the secondary mortgage market

Through the acquisition of other savings institutions in neighboring regions

Through vast marketing efforts

Savings institutions tend to prefer to remain local for their brick-and-mortar operations. To help keep
their institutions financially sound, they reach a larger area by participating in the secondary mortgage
market.

Question 49

Tyrone is looking for single-lot investment opportunities. What would be most important for him to
research?

The community's demographics

The community's growth patterns

The community's infrastructure

 The voting history of the community's planning board

Part of an investor's due diligence in researching a potential single-lot investment is an examination of

the community's growth patterns. Is the community waning, exploding, or something in between?

Question 50

As supply decreases, what happens to price?

Decreases

Exceeds demand

Increases

Stays the same

Supply and price move in opposite directions, so price increases when supply decreases. When there
is less to go around, prices increase. This is the same thing as saying demand exceeds supply.

Question 51

Lorenzo just received a prestigious fellowship to study abroad for a year! However, he still has six
months left on his one-year apartment lease. His landlord has given him permission to draw up a new
agreement with his sister Maggie, whereby Maggie will live in the apartment, pay rent to Lorenzo, and
then Lorenzo will pay the landlord. This is an example of ______.

Assignment

Assimilation

Subleasing

Transfer
Subleasing requires the landlord's permission, but the original tenant still pays the landlord as the
lease specifies.

Question 52

The risk that is directly related to leverage is called ______ risk.

Business

Capital

Financial

Leverage

The more money an investor leverages (or borrows), the greater the financial risk.

Question 53

Rental property owners are exempt from fair housing laws if which of the following conditions is met?

The owner doesn't own more than four single-family homes.

The owner occupies a building with not more than four families.

The owner occupies a building with not more than six families.

The owner uses a real estate licensee to rent the dwelling.

If the owner occupies a building with no more than four families, that owner is exempt.
Question 54

______ managers live in and manage apartment buildings.

Community

Concierge

House

Resident

Resident managers reside in and manage apartment buildings.

Question 55

In investments, each type of depreciation is defined by a particular event. Which of the following best
describes a depreciation type and an event it's tied to?

Economic depreciation and cost recovery

Economic depreciation and physical deterioration

Operating depreciation and taxing authority

Tax depreciation and physical deterioration

Economic depreciation is often tied to physical deterioration.

Question 56

Applying a capitalization rate to the net operating income is one way to determine a property's ______
value.
 Assessed

Depreciated

Investment

Market

Applying a cap rate to the NOI is one way to determine a property's investment value.

Question 57

Second-home condo investments that are purchased with a money-back guarantee and lock-in
management agreement are generally considered by the SEC to be _______.

Cooperatives

Illegal

Real estate

Securities

The SEC considers these types of investments to be securities, rather than real estate.

Question 58

Gloria is renting a cottage from Edward when she lands a job in Canada. She still has six months left
on her lease, but Edward tells her he usually has no problem renting the cottage and releases her with
no penalty. What type of lease termination is this?

Constructive eviction

Expiration
 Mutual agreement

Periodic estate termination

Mutual agreement is what happens when a landlord and tenant mutually agree to terminate a lease
agreement before the lease expiration.

Question 59

A lender requests an appraisal of a property under foreclosure. What type of value is the lender most
likely to be interested in?

Going-concern value

Insured value

Investment value

Liquidation value

The property probably won't fetch market value, but the appraiser can determine a liquidation value
where the sale removes the property from the bank's non-performing assets.

Question 60

The regulatory environment, the availability of utilities, the permitting process, and the
_____________________ can be barriers to completing a land development project.

Community's attitude toward development

Price of oil and gas

Quality of building materials

 Transportation infrastructure

Barriers to completing a land development project may include the regulatory environment, the
community's attitude toward development, the permitting process, and the availability of utilities.