Sale to Broker's Prospect After Termination of Listing +12California · Real Estate · English

To recover under a listing, the broker must produce an offer satisfying the listing's terms within the time limit. Negotiations during the listing with someone who later buys do not automatically entitle the broker to a commission. However, special circumstances may require payment — for example, where the sale is consummated directly by buyer and seller after expiration on the same terms (or with only a price reduction to the buyer), suggesting the broker was the procuring cause. Brokers protect themselves with a 'protective' or 'safety/savings clause' under which the seller agrees to pay a commission if the property is sold within a specified number of days after expiration to a person with whom the broker negotiated during the listing. Such clauses ordinarily require the broker to furnish the owner a list of prospective buyers within a prescribed number of days after expiration.

• ✓The broker must produce a conforming offer within the listing's time limit to recover under the contract
• ✓A protective/safety clause obligates the seller to pay if the property is sold within a set period after expiration to a broker's registered prospect
• ✓Safety clauses ordinarily require the broker to furnish the owner a list of prospects within a prescribed number of days after expiration

Even if the broker did not negotiate with anyone during the listing term, the seller may waive the expiration by encouraging the broker to continue efforts. If the broker continues in reliance and produces a buyer to whom the property is sold, the broker may earn a commission without literal compliance with the listing terms. This raises the issue of waiver of the termination date versus compliance with Business and Professions Code § 10176(f).

• ✓A seller may waive the listing's expiration by encouraging the broker to continue efforts
• ✓A broker acting in reliance on that waiver who produces a buyer may earn a commission despite non-literal compliance
• ✓The waiver issue is measured against compliance with B&P Code § 10176(f)

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 established national standards for mortgage loan originators.

• ✓SAFE Act (Title V of P.L. 110-289) enacted July 30, 2008; states had one year to comply or HUD would take over regulation
• ✓MLO licensure required in California for making/arranging loans primarily for personal, family, or household use secured by 1 to 4 residential units (B&P Code 10166.01(d))
• ✓SAFE Act established the Nationwide Mortgage Licensing System and Registry (NMLS); the DRE is a participating agency

Applicants for MLO endorsement must meet criminal background, examination, financial, and educational requirements.

• ✓Each MLO applicant must undergo a criminal history and background check including review of felony convictions involving fraud, dishonesty, breach of trust, or money laundering
• ✓Applicants must pass a qualifying written examination, demonstrate financial responsibility, and meet educational requirements (B&P 10166.03-.06)
• ✓Loan processors and underwriters must be employees of the broker or separately licensed if independent contractors
• ✓MLO license endorsement has a one-year term requiring annual renewal reports

Violations of the MLO law carry per-day monetary penalties.

• ✓Penalties assessed at $50 per day for the first 30 days after assessment, then $100 per day thereafter, up to a maximum of $10,000 (B&P 10166.02)
• ✓Violations include failing to notify the DRE of MLO activity or failing to obtain the required endorsement

MLOs employed by insured depository institutions register rather than obtain state licensing.

• ✓MLOs working for insured depository institutions or their controlled subsidiaries must register with NMLS but do not require state licensing or examination
• ✓SAFE Act requires state-licensed MLOs to submit fingerprints to NMLS for FBI criminal background checks and authorize credit reports

Functional obsolescence is caused by deficiency or superadequacy and is curable or incurable. Curable means it costs less to fix than the market will pay. External obsolescence comes from factors outside the property and is not curable.

• ✓Functional obsolescence caused by deficiency or superadequacy; can be curable or incurable
• ✓Curable = costs less to correct than the market pays for it
• ✓External obsolescence is caused by outside factors and is NOT curable
• ✓Superadequacy example: $60,000 pool where market pays only $10,000

Value is created, maintained, modified, and destroyed by four forces: Environmental/physical characteristics, Social ideals and standards, Economic influences, and Political/government regulations. These forces interweave and are in constant change.

• ✓Four forces: Physical/Environmental, Social, Economic, and Political/Government
• ✓The four forces interweave and are in a constant state of change
• ✓Political forces include zoning, building codes, rent controls, and fiscal/monetary policy

Location is exceptionally important and must relate to highest and best use. Other factors include size, corner influence, shape, thoroughfare conditions, exposure, plottage/assemblage, and topography/soil. Plottage adds value when parcels are combined for greater utility.

• ✓Location influences demand and must relate to highest and best use
• ✓Plottage/assemblage = added value when parcels are combined for greater utility
• ✓Irregular-shaped lots generally cannot be developed as advantageously as rectangular lots

Potential gross income is calculated by multiplying units by monthly rent times 12, then adding other income (e.g., parking and laundry). Effective gross income is potential gross income less vacancy and collection losses. Example: 30 two-bedroom units at $600 plus 20 one-bedroom units at $475 plus $1,200/month other income = $344,400 potential gross; less 5% vacancy = $327,180 effective gross.

• ✓Effective Gross Income = Potential Gross Income minus vacancy and collection losses
• ✓Include all other income (parking, laundry) in potential gross income
• ✓Annualize monthly rents by multiplying by 12

When determining net income, improper deductions must be removed. Capital improvements, depreciation, and entertainment/personal expenses are NOT allowable operating expenses. Allowable categories are fixed expenses (taxes, insurance, license), variable expenses, and reserves for replacements. Net income = effective gross income minus total allowable expenses.

• ✓Capital improvements and depreciation are not allowable operating expense deductions
• ✓Entertainment/personal expenses are improper deductions
• ✓Net income = effective gross income minus reconstructed (allowable) expenses

Property value is estimated by dividing net income by the overall capitalization rate. Example: $239,080 net income ÷ 0.095 cap rate = $2,516,632, rounded to $2,500,000. A lower cap rate yields a higher value and vice versa.

• ✓Value = Net Operating Income ÷ Capitalization Rate
• ✓A higher cap rate produces a lower value; a lower cap rate produces a higher value

The Subdivided Lands Law requires the Commissioner deny a public report unless affirmative standards for suitability and fair dealing are met.

• ✓Two major aspects: suitability for intended use and fair dealing in sale/lease
• ✓Residential offerings must include vehicular access, potable water source, available utilities, and offsite improvements
• ✓Fair dealing standards include security of buyer's deposit money, clearing mechanics' liens, release from blanket encumbrances, and conveyance of proper title
• ✓The Commissioner must deny a public report if the offering is not suitable for its proposed use

A copy of the public report must be delivered to prospective purchasers with time to read it before any offer is made, and a signed receipt must be retained.

• ✓The report must be delivered and the purchaser given time to read it before any offer to purchase or lease
• ✓The prospective purchaser signs a receipt on a Commissioner-approved form
• ✓The subdivider must retain the receipt for three years for the Commissioner's inspection
• ✓A notice posted in the sales office must state the report is available to any member of the public upon request

Before subdivided land can be offered, a Notice of Intention combined with a Questionnaire and Application must be filed with the Commissioner on DRE forms.

• ✓A Notice of Intention must be filed before subdivided land is offered for sale or lease
• ✓It is combined with a Questionnaire and Application on DRE-provided forms
• ✓Usually the owner files; anyone filing on behalf must furnish written authorization from the owner

Willful violation of specified Code sections is a public offense with fines and possible imprisonment, prosecuted by district attorneys.

• ✓Maximum fine not to exceed $10,000, or up to one year in county jail or state prison, or both
• ✓The district attorney of each county is charged with prosecuting violators
• ✓The Commissioner may also impose disciplinary actions against licensees

Subdivision filings are made at the DRE district office responsible for the subdivision's location, with subdivision offices in Sacramento and Los Angeles.

• ✓Subdivision offices are located in Sacramento and Los Angeles
• ✓Undivided interest subdivisions, certain qualified limited-equity housing cooperatives, and time-share offerings must be filed at the Sacramento office
• ✓The Commissioner must hold a hearing at least once each year to consider subdivision filing fees

In California, counties and general law cities cannot grant use variances authorizing a land use not otherwise permitted in a zone.

• ✓Counties and general law cities are prohibited from granting use variances
• ✓A zoning variance cannot waive a use restriction (e.g., allowing retail in a single-family residential zone)

When a parcel's size, shape, topography, or location prevents meeting a zoning standard, the owner may apply for a waiver (variance) of strict application. A granted variance provides the same, but not additional, development privileges as neighboring parcels.

• ✓A variance waives strict application of a zoning standard (e.g., setback) due to unique parcel conditions
• ✓A variance provides the same, but not additional, development privileges as neighboring parcels in the same zone

The federal Real Estate Disclosure and Notification Rule requires owners of residential dwellings built before 1978 (target housing) to disclose the presence of lead-based paint and hazards and provide known information/reports. Lead-based paint was banned for residential use in 1978.

• ✓Applies to residential dwellings built before 1978 (target housing)
• ✓Lead-based paint was banned for residential use in 1978
• ✓Owners must disclose presence of lead-based paint and provide known reports/records
• ✓Violation may result in civil and/or criminal penalties

The seller/lessor must deliver the EPA pamphlet 'Protect Your Family From Lead In Your Home' before a contract is formed (later delivery gives cancellation rights) and must offer a buyer a 10-day period to inspect for lead-based paint. The Rule does not require the seller to pay for inspection or remove hazards. Form FLD is typically used.

• ✓EPA pamphlet must be delivered before the contract is formed
• ✓Buyer must be offered a 10-day inspection period (may be increased, decreased, or waived by written agreement)
• ✓The Rule does not require the seller to pay for inspection or remove lead hazards
• ✓Disclosure documents must be retained for three years from completion of sale/lease
• ✓Form FLD is the typical C.A.R. lead disclosure form

Target housing does not include pre-1978 housing sold at foreclosure (though subsequent sales are covered), 0-bedroom dwellings, dwellings leased for 100 or fewer days without renewal, housing for the elderly/handicapped unless children reside there, renewed leases satisfying the Rule, or housing inspected and found free of lead-based paint.

• ✓Foreclosure sale is exempt but a subsequent sale is covered
• ✓0-bedroom dwellings (loft/efficiency/studio) are exempt
• ✓Leases of 100 or fewer days without renewal are exempt
• ✓Elderly/handicapped housing is exempt unless children reside or are expected

B&P Code Section 10145 and Regulation 2832 require a trust account to meet specific criteria regarding designation, location, and interest-bearing status.

• ✓Must be designated as a trust account in the name of the broker as trustee
• ✓Must be maintained with a bank or recognized depository located in California
• ✓Must not be an interest-bearing account requiring prior written notice for withdrawal (with exceptions)
• ✓Out-of-state trust accounts allowed if FDIC-insured and used to service first loans per Section 10145(a)(2)

Use of an escrow holder specializing in business bulk transfers is advisable for all business opportunity transactions. The escrow holder ensures compliance with the Bulk Sales Law (Commercial Code Section 6101 et seq.) and Secured Transactions statutes (Commercial Code Section 9101 et seq.).

• ✓Escrow holder conducts lien searches and publishes/records/mails Notice to Creditors of Bulk Transfer
• ✓Escrow holder obtains tax releases from government agencies that could impose successor tax liability
• ✓Escrow holder acts as a clearing house for funds and documents and provides accounting at close
• ✓The IRS does not give tax clearances; tax lien insurance may be available in some parts of California

A real estate broker's license is not required for certain M.O.G. activities: acting as a depository under an oil and/or gas lease if not for the purpose of a sale; engaging in a transaction subject to a court order; engaging in the business of drilling for or producing oil or gas, or mining for or producing minerals; negotiating or entering leases/agreements between owners of M.O.G. lands and specified production businesses; and dealing with mineral rights or land (other than oil or gas) as the owner of the rights or land.

• ✓Acting as a depository under an oil/gas lease not for a sale is exempt
• ✓Drilling for or producing oil, gas or minerals is exempt from licensing
• ✓Negotiating leases between owners and production businesses on their behalf is exempt
• ✓Dealing with mineral rights or land (other than oil/gas) as the owner is exempt

Area conversions: 1 square foot = 144 square inches; 1 square yard = 9 square feet; 1 square rod = 30 1/4 square yards; 1 acre = 10 square chains, 160 square rods, 4,840 square yards, or 43,560 square feet. An acre as a square is approximately 208.71 feet on a side.

• ✓1 acre = 43,560 square feet = 4,840 square yards = 160 square rods
• ✓1 square yard = 9 square feet; 1 square foot = 144 square inches
• ✓An acre as a square is about 208.71 feet per side

Government land descriptions: a section = 1 square mile or 640 acres; a township = 36 square miles; a quarter section = 160 acres. Area of a square or rectangle = length × width in linear units used.

• ✓A section = 1 square mile = 640 acres
• ✓A township = 36 square miles
• ✓A quarter section = 160 acres

Key linear conversions: one foot = 12 inches; one yard = 3 feet or 36 inches; one rod = 16 1/2 feet or 5 1/2 yards; one furlong = 40 rods; 100 feet = 6.6 rods; one mile = 5,280 feet, 1,760 yards, 320 rods, or 80 chains.

• ✓One rod = 16 1/2 feet or 5 1/2 yards
• ✓One mile = 5,280 feet = 1,760 yards = 320 rods = 80 chains
• ✓One furlong = 40 rods; one yard = 3 feet

Old surveyors' measurements: 1 link = 7.92 inches; 1 rod = 25 links; 1 chain = 4 rods or 66 feet. Modern surveyors use an engineer's steel-tape chain that is 100 feet long with one-foot links, so a mile measures 52.8 chains.

• ✓1 link = 7.92 inches; 1 rod = 25 links
• ✓1 chain = 4 rods or 66 feet
• ✓Modern engineer's chain = 100 feet; a mile = 52.8 modern chains

Cubic measurement = length × width × height: 1 cubic foot = 1,728 cubic inches; 1 cubic yard = 27 cubic feet. Area of a triangle = base × 1/2 height.

• ✓1 cubic foot = 1,728 cubic inches; 1 cubic yard = 27 cubic feet
• ✓Area of a triangle = base × 1/2 height
• ✓Cubic measurement = length × width × height

Appraisal is an estimate/opinion of value from analysis of facts. The cost approach estimates replacement cost of improvements less accrued depreciation plus land value. The income (capitalization) approach applies to income property: find net annual income, set a capitalization rate, then divide net income by the rate. The comparison (market) approach compares the subject with comparable properties. Correlation (reconciliation) interprets all three to reach a single value.

• ✓Cost approach = replacement cost - accrued depreciation + land value
• ✓Income approach: value = net annual income ÷ capitalization rate
• ✓Comparison/market approach uses comparable sales
• ✓Correlation (reconciliation) reconciles the three approaches into a single value

Highest and best use is the use producing the greatest net return over time and is the starting point for appraisal. Principle of anticipation: value is created by anticipated future benefits. Principle of conformity: maximum value with reasonable homogeneity. Principle of contribution: a component is valued by its contribution to the whole. Principle of change: the future is of prime importance in estimating value.

• ✓Highest and best use produces the greatest net return and is the starting point for appraisal
• ✓Anticipation holds value is created by anticipated future benefits
• ✓Conformity holds maximum value arises with reasonable homogeneity of improvements
• ✓Contribution values a component by its contribution to the whole property

Depreciation is loss of value from age, physical deterioration, or functional/economic obsolescence. Accrued depreciation is the difference between replacement cost new and present appraised value. Functional obsolescence is loss from adverse factors within the structure. Economic obsolescence is loss from factors away from the property. Curable depreciation is customarily repaired by a prudent owner.

• ✓Depreciation results from age, physical deterioration, or functional/economic obsolescence
• ✓Functional obsolescence comes from within the structure; economic obsolescence from external factors
• ✓Curable depreciation is economically worth repairing

Fair market value is what a property would bring on the open market over a reasonable period with informed buyer/seller under no pressure. Gross rent multiplier (GRM) times gross income produces an estimate of value. Capitalization determines value by dividing annual net income by the capitalization rate. Assessed valuation is set by a public authority as a basis for taxes.

• ✓Fair market value assumes an informed buyer and seller acting without pressure
• ✓GRM × gross income = estimate of property value
• ✓Capitalization: value = annual net income ÷ capitalization rate
• ✓Assessed valuation is the basis for levying property taxes

The appraisal process uses three approaches: cost approach (replacement cost less accrued depreciation plus land value), market/comparison approach (comparing similar recently sold properties), and income/capitalization approach (net income divided by capitalization rate). Correlation/reconciliation interprets all three to reach a single value.

• ✓The cost approach = replacement cost minus accrued depreciation plus land value
• ✓The income approach divides net income by the capitalization rate to find value
• ✓Correlation (reconciliation) interprets the three approaches into a single value conclusion

Market value is the highest price in money a property will bring in a competitive, open market with prudent, knowledgeable buyer and seller under no undue pressure. Market price is the price actually paid regardless of pressures or motives. Fair market value assumes both parties know all uses and neither is under pressure.

• ✓Market value assumes a willing buyer and seller acting knowledgeably with no undue pressure
• ✓Market price is the price actually paid regardless of motives or pressure

Depreciation is loss of value from age, physical deterioration, or functional/economic obsolescence. Physical deterioration is wear and tear (curable/incurable). Functional obsolescence stems from adverse factors within the structure. Economic (external) obsolescence results from factors outside the property. Accrued depreciation is the difference between replacement cost new and current value.

• ✓Functional obsolescence arises from factors within the structure
• ✓Economic obsolescence results from factors outside/away from the property
• ✓Accrued depreciation is replacement cost new minus present appraised value

Key valuation principles include: anticipation (value from future benefits), substitution (value set by cost of equal substitute), conformity (homogeneity maximizes value), progression (lesser property enhanced by higher-valued neighbors), contribution, competition, change, and supply and demand.

• ✓Substitution holds value is set by the cost of an equally desirable substitute
• ✓Highest and best use produces the greatest net return to land and buildings
• ✓Conformity holds maximum value results from reasonable homogeneity of improvements

Highest and best use is the use producing the greatest net return over a period; it is the starting point for appraisal. Plottage (assemblage) increases value when contiguous lots are combined. Overimprovement/underimprovement/misplaced improvements are not the highest and best use.

• ✓Highest and best use produces the greatest net return and is the starting point for appraisal
• ✓Plottage increment is the increased value from combining smaller lots into one
• ✓An overimprovement exceeds the highest and best use of the site

The gross rent multiplier times gross income estimates property value. Capitalization determines value by dividing net income by the capitalization rate, which reflects a reasonable return plus recapture for depreciating improvements.

• ✓Value = gross income × gross rent multiplier
• ✓Value by capitalization = net annual income ÷ capitalization rate

The Mortgage Loan Disclosure Statement is a form approved by the Real Estate Commissioner that a mortgage loan broker must furnish to a prospective borrower for statutorily-prescribed loans before the borrower becomes obligated.

• ✓Form approved by the Real Estate Commissioner
• ✓Required to be furnished by a mortgage loan broker
• ✓Must be given before the borrower becomes obligated to complete the loan

The secondary market is where lenders sell existing loans (deeds of trust and promissory notes) to large secondary marketing agencies (FNMA, FHLMC, GNMA) or other investors, distinct from the primary market where lenders loan to borrowers.

• ✓Primary market: lenders loan money to borrowers
• ✓Secondary market: lenders sell existing loans to agencies or investors
• ✓Agencies include FNMA, FHLMC, and GNMA

A mortgage banker's principal business is originating, financing, closing, selling and servicing loans secured by real property for institutional lenders. A mortgage investment company buys mortgages for investment.

• ✓Mortgage banker originates, finances, closes, sells, and services loans for institutional lenders
• ✓Mortgage investment company buys mortgages for investment purposes

Mortgage guaranty insurance protects mortgage lenders from financial loss via private mortgage insurance companies (PMICs). Private mortgage insurance (PMI) is available to conventional lenders on the high-risk portion of a loan.

• ✓Mortgage guaranty insurance protects lenders against loss
• ✓PMI applies to conventional lenders on the first, high-risk portion of the loan
• ✓Provided by private mortgage insurance companies

Monetary controls are Federal Reserve tools for regulating the availability of money and credit to influence economic activity, such as adjusting discount rates and reserve requirements.

• ✓Federal Reserve tools regulate money and credit availability
• ✓Include adjusting discount rates and reserve requirements

Mutual savings banks are financial institutions owned by depositors with rights to net earnings proportional to deposits. A mutual water company secures water supply for users, issuing stock to users.

• ✓Mutual savings banks are owned by depositors
• ✓Mutual water company issues stock to water users