Real Estate Exam Practice Questions
28 practice questions across 3 topics. Every answer includes a detailed explanation.
Showing 28 of 28 questions
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An option contract gives one party the right to purchase (or lease) property at a set price within a specified time period, with no obligation to do so. A right of first refusal gives one party the right to match any offer a seller receives from a third party before the seller can sell to that third party. Option contracts require consideration (payment); rights of first refusal may not.
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Contingencies are conditions that must be satisfied for the contract to remain binding; if a contingency is not satisfied, the buyer can terminate without penalty. Common contingencies include inspection, appraisal, financing, and title approval. Conditions are similar but may bind both parties. Contingencies are one of the buyer's primary tools to protect themselves in a transaction.
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Liquidated damages are a pre-agreed amount (typically the buyer's earnest money deposit) that the seller keeps if the buyer breaches the purchase contract. The rules and caps vary by state.
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A valid real estate contract requires competent parties, mutual consent (offer and acceptance), lawful object, sufficient consideration, and a writing signed by the party to be charged.
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Sellers must disclose all known defects and adverse conditions affecting the property's value or desirability. Disclosures typically cover structural issues, systems (roof, plumbing, electrical), environmental hazards, previous damage, and title defects. Failure to disclose can expose the seller to liability and give buyers grounds to void the contract or sue for damages.
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The Statute of Frauds requires that contracts for the sale of land (or any interest in land) must be in writing to be enforceable. A written memorandum or contract signed by the party to be charged is necessary. Oral agreements to buy or sell real estate are unenforceable under the Statute of Frauds.
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When a buyer breaches a purchase agreement, the seller can typically pursue liquidated damages (keeping the deposit), sue for actual damages, or seek specific performance to force the buyer to complete the purchase.
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Specific performance is a court-ordered remedy that forces a party to complete a real estate transaction as agreed in the contract, rather than simply paying money damages.
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A void contract has no legal effect from the start and cannot be enforced by either party. A voidable contract is valid until the injured party chooses to cancel it.
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The Statute of Frauds requires that certain contracts, including real estate purchase agreements and leases longer than one year, must be in writing to be enforceable.
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Conventional loans require 3-20 percent down and typically require good credit; borrowers pay for private mortgage insurance (PMI) if down payment is less than 20 percent. FHA loans require 3.5 percent down, accept lower credit scores, and require mortgage insurance for the life of the loan (in most cases). VA loans (for eligible veterans) require zero percent down, have no mortgage insurance requirement, and offer favorable terms for eligible borrowers.
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The main mortgage types are conventional loans (issued by private lenders, typically require 5 percent to 20 percent down payment); FHA loans (insured by the Federal Housing Administration, down payment as low as 3.5 percent); VA loans (guaranteed by the Veterans Administration, available to military veterans with no down payment requirement); and USDA loans (guaranteed by the United States Department of Agriculture, available in rural areas with no down payment). Each type has different qualification standards, insurance requirements, and lending limits.
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TILA (Truth in Lending Act), implemented through Regulation Z, requires lenders to provide clear, consistent disclosure of the actual cost of credit, including the annual percentage rate (APR), finance charges, payment schedule, and other material loan terms. TILA applies to consumer credit transactions secured by residential property. The right of rescission is the borrower's right to cancel certain credit transactions (typically refinances and home equity loans, but not purchase mortgages) within three business days after signing the loan documents without penalty. TILA violations can result in significant penalties and borrower claims.
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Loan-to-value (LTV) is the ratio of the loan amount to the property's value or purchase price, whichever is lower. LTV = Loan Amount ÷ Property Value. PMI is required on conventional loans when the LTV exceeds 80 percent (down payment is less than 20 percent). PMI is mortgage insurance that protects the lender if the borrower defaults. PMI can typically be canceled once the borrower's equity reaches 20 percent of the original purchase price.
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Judicial foreclosure requires a court process where the lender files suit and obtains a judgment before the property is sold; this method is used in lien theory states like Florida and typically takes 6 to 12 months or longer. Non-judicial foreclosure bypasses the court system and is conducted by a trustee (in deed of trust states) or other authorized party; this method is used in title theory states like California and Texas and is faster (California approximately 120 days, Texas 20 to 40 days). Redemption rights (the right to reclaim the property after a foreclosure sale) vary by state; California allows 90-day redemption, Texas provides no statutory redemption, and Florida allows 6 months to 2 years depending on circumstances.
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Judicial foreclosure requires court involvement; the lender files suit, obtains a judgment, and the court orders the property sold. Non-judicial foreclosure follows a statutory process outside of court; the lender or trustee follows notice and sale procedures without court approval. Judicial foreclosure takes longer but offers more borrower protections. Non-judicial foreclosure is faster but provides fewer opportunities for the borrower to challenge the sale.
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A mortgage is a two-party instrument between lender and borrower; a deed of trust is a three-party instrument involving borrower, lender, and a neutral trustee. In deed of trust states, the trustee may conduct non-judicial foreclosure without court involvement. In mortgage states, foreclosure is typically judicial, requiring court approval.
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The loan qualification process involves lenders evaluating a borrower's creditworthiness through credit history, income, employment, assets, and debt obligations. Pre-qualification is an informal estimate based on stated information; pre-approval involves verification of income, employment, credit, and assets and results in a conditional loan commitment. Lenders use debt-to-income (DTI) ratios (monthly debt payments divided by gross monthly income) to assess borrowing capacity, typically requiring DTI of 43 percent to 50 percent for conventional loans. Underwriting is the formal review process where lenders verify all borrower information and make the final loan approval decision.
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Deed restrictions (also called restrictive covenants or CC&Rs) are private agreements recorded in property deeds that limit how land can be used. Unlike zoning, which is a government regulation, deed restrictions are created by developers or property owners and enforced by homeowners' associations or neighboring property owners through civil lawsuits.
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In community property states (California and Texas), property acquired during marriage by either spouse is owned equally and jointly by both spouses, regardless of whose name is on the title. Separate property (owned before marriage, inherited, or received as a gift) belongs to the spouse who acquired it. In divorce, community property is divided equally between spouses; separate property generally goes to the spouse who owns it.
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An encumbrance is any right or interest in property that diminishes its value or restricts its use, including mortgages, liens, and easements. An easement is the most common type; it grants someone the right to use another's land for a specific purpose (such as a utility easement or right of way) without owning the land. Easements can be created by express grant, necessity, implication, or adverse possession and typically continue even after property is sold.
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Homestead exemptions protect a primary residence from forced sale by most creditors and reduce property tax assessments. The level of protection varies dramatically by state: Texas and Florida offer unlimited homestead protection from creditors (with acreage limits), while most other states cap the exempt equity amount.
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Joint tenancy includes the right of survivorship; when one joint tenant dies, their share passes automatically to the surviving joint tenant(s). Tenancy in common has no survivorship; when one tenant dies, their share passes through their estate according to their will or the state's intestacy laws. Joint tenants must have equal shares and equal rights; tenants in common can have unequal shares.
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Zoning divides land into districts (residential, commercial, industrial) with different permitted uses. A zoning variance is a waiver allowing a property owner to use their property contrary to the zoning code when strict application of the code creates a hardship. A nonconforming use is a use that existed before the zoning ordinance was enacted and is allowed to continue even though it no longer complies with current zoning; however, if the use is discontinued, it typically cannot resume.
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Adverse possession allows someone to gain legal ownership of another person's land by occupying it openly and continuously for a statutory period. The possession must be actual, open and notorious, exclusive, hostile (without permission), and continuous for the required number of years. The statutory period varies by state, ranging from 5 to 20 years.
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Eminent domain is the government's power to take private property for public use, such as for highways, schools, or utilities. The Fifth Amendment requires that the property owner receive just compensation, defined as fair market value at the time of the taking. The owner cannot refuse the taking, but can challenge whether fair market value was paid.
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In a condominium, each owner holds fee simple title to their individual unit plus an undivided interest in the common areas. In a cooperative (co-op), a corporation owns the entire building and each resident owns shares in the corporation plus a proprietary lease granting the right to occupy a specific unit. This distinction affects financing, taxes, transfer rights, and liability.
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Fee simple absolute is absolute ownership with no limitations on duration or transferability; the owner can hold it forever and leave it to heirs. A life estate terminates when a named person (the life tenant) dies; ownership then passes to a remainder person or reverts to the grantor.
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