Real Estate ExamStudy Topic
Real Estate Principles Study Guide for the Licensing Exam
Study real estate principles for your licensing exam. Covers property ownership types, legal descriptions, fair housing law, and appraisal approaches.
Topic Overview
Property ownership can take many forms, and the real estate exam tests the distinctions between them carefully. Freehold estates represent ownership interests: a fee simple estate is complete, unconditional ownership that can be transferred freely; a life estate grants ownership for the duration of someone's life, after which ownership reverts to the original grantor (reversion) or passes to a named third party (remainder). Leasehold estates are possessory interests without ownership: an estate for years has a fixed start and end date (no notice to terminate required), a periodic tenancy (month-to-month) continues automatically until one party provides proper notice, and a tenancy at will continues at the mutual agreement of both parties with no defined term. Co-ownership forms include tenancy in common (each owner holds an undivided fractional interest, freely transferable, no right of survivorship), joint tenancy (requires the four unities of time, title, interest, and possession; includes right of survivorship), and tenancy by the entirety (available only to married couples in some states; right of survivorship, cannot be conveyed without both spouses' consent).
Legal descriptions define the exact location and boundaries of real property. The three systems tested on the real estate exam are the metes and bounds method (describes the boundary by courses and distances from a point of beginning), the rectangular (government) survey system (divides land into 6-mile-square townships, each subdivided into 36 one-square-mile sections, with further subdivision into halves and quarters -- tested through section calculation problems), and the recorded plat (lot and block) method (describes property by lot and block number within a recorded subdivision map).
Fair housing law is one of the most heavily tested topics on the national portion. The federal Fair Housing Act of 1968 (as amended) prohibits discrimination in housing transactions based on race, color, national origin, religion, sex, disability, and familial status (these are the seven protected classes). Familial status protects families with children under 18 and pregnant women. Disability protections include the right to reasonable accommodations (changes to rules or policies) and reasonable modifications (physical changes to the unit). The act prohibits steering, redlining, blockbusting, discriminatory advertising, and refusing to negotiate with a protected class member.
Appraisal basics tested on the real estate exam include the three approaches to value: the sales comparison approach (comparing the subject property to recent sales of similar properties with adjustments for differences), the cost approach (estimating the value of the land plus the depreciated replacement cost of improvements), and the income approach (capitalizing net operating income using a capitalization rate to produce an indicated value, primarily used for income-producing property). Candidates must understand the principle of substitution (a buyer will not pay more for a property than the cost of an equally desirable substitute), conformity, contribution, and highest and best use.
- Confusing joint tenancy and tenancy in common; joint tenancy includes the right of survivorship (a deceased owner's share passes automatically to the surviving co-owners), while tenancy in common does not (the deceased's share passes through their estate).
- Getting section numbers wrong in the rectangular survey system; sections are numbered 1 to 36 starting in the northeast corner of the township, snaking back and forth, with section 1 in the top-right and section 36 in the bottom-right. This is counterintuitive and frequently tested.
- Confusing reasonable accommodations and reasonable modifications under fair housing disability protections; an accommodation is a change to a rule or policy, while a modification is a physical change to the property. The cost of modifications is typically the responsibility of the tenant (in most residential situations).
- Applying the income approach to owner-occupied residential property; the income approach is used primarily for income-producing properties such as rental apartments and commercial buildings, not for single-family owner-occupied homes.
- Forgetting that blockbusting (inducing owners to sell by suggesting a protected class is moving in) is a fair housing violation even if no actual protected-class member is involved; the act of making the suggestion is itself the violation.
- Treating the sales comparison approach adjustments as adding to the subject instead of adjusting the comparable; you adjust the comparable sale price up if the comparable is inferior to the subject, and down if it is superior.
Checkpoint Quiz
Test your understanding of Real Estate Principles
These questions are for study practice only and are not official exam questions.
1. A property owner has the right to use her land, sell it, lease it, or give it away. Together, these rights are commonly called the:
2. Under the Fair Housing Act of 1968, which of the following is NOT a protected class at the federal level?
3. A fee simple estate is BEST described as:
4. Which type of legal description uses compass bearings and distances to describe a parcel of land?
5. A deed transfers title from the grantor to the grantee. Which of the following must a valid deed contain?
6. Steering -- directing buyers toward or away from neighborhoods based on race -- is illegal under the Fair Housing Act. Which of the following scenarios is an example of steering?
7. Which type of deed offers the GREATEST protection to the grantee?
8. A life estate grants ownership rights that last for:
9. An easement appurtenant benefits:
10. The government's right to take private property for public use with just compensation is called:
Frequently asked questions
What are the seven protected classes under the federal Fair Housing Act?
The seven federally protected classes are race, color, national origin, religion, sex, disability, and familial status (families with children under 18 and pregnant women). Many states and local jurisdictions add additional protected classes such as source of income, sexual orientation, or marital status. Know both the federal list and any state additions for your exam.
What is the difference between a fee simple estate and a life estate?
A fee simple estate is the highest form of real property ownership -- complete, unconditional ownership that can be sold, mortgaged, or inherited without restriction. A life estate is an ownership interest limited to the duration of someone's life (either the holder's life or another named person's life). When that person dies, the property either reverts to the grantor or passes to a named remainderman.
How is a township divided in the rectangular survey system?
A township is a 6-mile by 6-mile square containing 36 sections, each 1 mile by 1 mile (640 acres). Sections are numbered 1 to 36 starting in the northeast corner of the township and snaking back and forth, ending with section 36 in the southeast corner. Each section can be further divided into halves and quarters (a quarter section is 160 acres).
What is the principle of highest and best use in real estate appraisal?
The highest and best use is the legally permissible, physically possible, financially feasible, and maximally productive use of a property. Appraisers use this concept to determine the use that will produce the highest property value and to select appropriate comparable sales. A property is appraised as if put to its highest and best use, even if the current use is different.
What is redlining and why is it a fair housing violation?
Redlining is the practice of refusing to provide mortgage loans, insurance, or other financial services in certain geographic areas, typically areas with high concentrations of minority residents, regardless of the qualifications of individual applicants. It is a form of discrimination based on race or national origin and violates the Fair Housing Act, the Equal Credit Opportunity Act, and the Community Reinvestment Act.
