Accounting Records - General Requirements +12California · Real Estate · English

Brokers must maintain adequate records for trust funds whether deposited, sent to escrow, held uncashed, or released to owners. Two types are permitted: columnar records (Regs 2831 and 2831.1) or GAAP-based records.

• ✓Records must show all receipts and disbursements chronologically with pertinent details
• ✓Records must show the trust account balance and the balance owing to each beneficiary/transaction
• ✓Either manual or computerized records are acceptable

A property manager must understand accounting and cost accounting and maintain complex trust account records. The fiduciary relationship between broker and owner requires an adequate trust fund accounting system with accurate records of all trust funds passing through the broker's hands. The manager must comply with trust account laws and regulations (discussed in Chapter 23).

• ✓An adequate trust fund accounting system is required due to the fiduciary relationship
• ✓Accurate records must be kept of all trust funds passing through the broker's hands
• ✓The property manager must comply with trust account laws and regulations
• ✓Responsibility for trust fund records is placed on the property management broker

Volume of business determines the number of bookkeeping records needed; small offices need simple records while larger operations require more elaborate methods. An outside accountant should be retained periodically to review the accounting system. Large firms may bond unlicensed office assistants so they can legally handle clients' funds.

• ✓Volume of business determines the number and complexity of bookkeeping records
• ✓An outside accountant should periodically review the accounting system
• ✓Unlicensed office assistants may be bonded so they can legally handle clients' funds

When sales, social security, and unemployment taxes are involved, no funds may be released to the seller until the seller provides escrow with clearances from the State Board of Equalization and the Department of Benefit Payments. The buyer can be held liable for the unpaid taxes of a predecessor (successor's tax liability) up to the amount paid for the business. Sales tax must be paid on fixtures and furniture, paid by the buyer to the seller, and collected by the state normally through escrow.

• ✓No escrow funds are released to seller until clearances from the State Board of Equalization and Dept. of Benefit Payments are provided
• ✓Buyer can be held liable for a predecessor's unpaid taxes (successor's tax liability) up to the purchase price
• ✓Sales tax must be paid on fixtures and furniture, paid by buyer to seller and collected by the state through escrow
• ✓Buyer typically makes the offer contingent on later inspection and approval of records; buyer and seller usually share closing costs equally

The sale of a business opportunity should begin with a properly completed exclusive authorization to sell agreement. The licensee is encouraged to use the Business Disclosure Statement (C.A.R. Form BDS), which assists in establishing listing price, disclosing material facts, proposing included/excluded items, relating to the purchase agreement, and providing the owner's warranty of accuracy and good marketable title.

• ✓Business opportunity sale should begin with an exclusive authorization to sell agreement
• ✓C.A.R. Form BDS (Business Disclosure Statement) discloses material facts and includes owner's warranty of accuracy and marketable title
• ✓The BDS provides financial information for the most recent year-to-date and preceding three years

The Business Listing Agreement (C.A.R. Form BLA) provides an exclusive listing and incorporates the BDS, documentation, a separate real property listing if applicable, terms of sale, compensation, business escrow/appraisal option, MLS, title representation, owner representations, broker's and owner's duties, agency relationships, and dispute resolution provisions.

• ✓A separate real property listing agreement is required if real property is included in the sale
• ✓Owner represents good and marketable title to the business and personal property
• ✓Broker agrees to use reasonable efforts and due diligence; owner agrees to provide disclosures, maintain insurance, and indemnify broker
• ✓Owner and broker agree to mediate disputes before arbitration or court, and may initial to agree to arbitration

All representations concerning a business must be those of the owner/seller, and a broker may be liable for personal representations or projections. The seller must have all equipment in working order when the buyer takes possession unless otherwise agreed, and must secure necessary government clearances. Any sale is subject to the buyer receiving all required licenses, permits, and clearances.

• ✓A broker may be liable for personal representations or projections that he or she makes
• ✓Seller must have equipment in working order on the day buyer takes possession unless agreed otherwise
• ✓Sale is subject to the buyer receiving all required licenses, permits, and clearances

Police power lets the State enact laws for public order, safety, health, morals and welfare (e.g., zoning). Eminent domain is the government's right to take private property for public use with just compensation (5th Amendment). Escheat reverts property to the State when there are no heirs. Taxation is the fourth government power.

• ✓Eminent domain requires just compensation for taking private property for public use
• ✓Police power enables zoning and regulation for public health, safety, and welfare
• ✓Escheat reverts property to the State when no heirs exist

Zoning specifies permitted property uses in areas. A nonconforming use predates current zoning and is allowed. Building codes, set back ordinances, building lines and deed restrictions (CC&Rs) limit development. A Planned Unit Development (PUD) permits clustering differing from normal zoning.

• ✓A nonconforming use is allowed because it predates the current zoning ordinance
• ✓CC&Rs and deed restrictions are private limitations on property use
• ✓Zoning is a public restriction; deed restrictions/CC&Rs are private restrictions

An easement is a limited right in another's land for a specific purpose. Prescription acquires easements by long continued use. Encroachment is an unlawful intrusion onto adjacent property by improvements. Riparian rights allow reasonable water use by adjacent landowners. Appropriation is diverting water for beneficial use.

• ✓An easement is a limited right in another's land for a specific purpose
• ✓A prescriptive easement is acquired through long continued use over the statutory period
• ✓Riparian rights allow reasonable use of water bordering the owner's land

Adverse possession acquires title through possession for a statutory period under certain conditions by a non-owner of record. Accession adds property by human effort or natural forces; accretion is gradual addition by natural forces (alluvium); avulsion is sudden loss of land by water; erosion is gradual wearing away.

• ✓Adverse possession requires possession for the statutory period under specified conditions
• ✓Accretion is gradual addition of land by natural forces; avulsion is sudden loss of land

Fixtures are appurtenances attached to land or improvements that become real property. Trade fixtures are business tenant's personal property that remain removable. Personal property (chattels) is any property that is not real property. Annexation attaches personal property to become a fixture.

• ✓Fixtures become real property; trade fixtures remain removable personal property of a business tenant
• ✓Real property includes land and things attached; personal property is everything else

A payment cap limits the increase in monthly principal and interest at the payment adjustment date and may cause negative amortization. A periodic interest rate cap limits note rate change at each adjustment.

• ✓Payment cap limits P&I increase and may cause negative amortization
• ✓Periodic interest rate cap limits note rate increase/decrease at each adjustment
• ✓Payment cap is often at the borrower's option

For an adjustable rate mortgage, the rate adjustment date is when the note rate may change, while the payment adjustment date is when the borrower's monthly principal and interest payment may change.

• ✓Rate adjustment date: note rate may change
• ✓Payment adjustment date: monthly P&I payment may change

A variable interest rate mortgage varies upward and downward over the loan term based on money market conditions. A renegotiable rate mortgage allows interest rate renegotiation at predetermined intervals (max 5% variation over life).

• ✓Variable rate changes with money market conditions
• ✓Renegotiable rate mortgage allows renegotiation at set intervals
• ✓Renegotiable rate maximum variation is five percent over the loan's life

A subsidy buydown is funds usually provided by the builder or seller to temporarily reduce the borrower's monthly principal and interest payment. Payment rate is the rate at which the borrower repays, reflecting buydowns or caps.

• ✓Subsidy buydown temporarily reduces the borrower's P&I payment
• ✓Typically provided by builder or seller
• ✓Payment rate reflects buydowns or payment caps

A residential landlord can be liable on simple negligence for injuries from hazardous conditions existing at renting that a reasonable inspection would reveal (e.g., slippery bathtub or staircase); merely warning is insufficient. For conditions arising later, the landlord must repair after tenant notice.

• ✓Residential landlords are liable in negligence for defects a reasonable inspection would reveal
• ✓Merely warning the tenant does not protect the landlord from liability
• ✓Landlord must repair later-arising dangerous conditions after receiving notice

Becker v. IRM Corp. (1985) held landlords strictly liable for injuries from latent defects (shattered non-tempered shower door). Peterson v. Superior Court (1995) reversed this, restoring the rule that a landlord is liable only if negligent in failing to discover and correct the defect.

• ✓Peterson v. Superior Court reversed Becker's strict liability rule
• ✓A landlord is now liable for latent defects only if negligent in discovering/correcting them

A non-residential landlord generally is not liable for defect injuries, but is liable if the lease places maintenance duty on the landlord, contains an affirmative repair covenant, or gives the landlord control over the defective area. The landlord is also liable if under a statutory repair duty, knows of a latent defect and fails to disclose/repair, or negligently repairs.

• ✓Non-residential landlord liability arises when the lease imposes maintenance duty or control
• ✓Landlord is liable for failing to disclose a known latent defect
• ✓Negligent repair or a statutory repair duty creates landlord liability

HMDA (Regulation C, 1975) requires creditors to collect and publicly disclose information about housing-related loans and applicants to determine whether lenders serve community credit needs and to identify discriminatory patterns. Institutions must report when home purchase loans equal/exceed 10% of loan volume, at least $25 million purchase money loans, $10 million in assets, or at least 100 home purchase loans.

• ✓HMDA requires collection and public disclosure of housing loan data to identify discriminatory patterns
• ✓A dwelling includes vacation/second homes, rental, multifamily, 1-4 family, condos, and mobile homes
• ✓HMDA excludes unimproved land loans, construction-only loans, and temporary financing
• ✓Reporting applies to institutions with $10 million in assets or 100+ home purchase loans

Section 11911 allows a county or city to adopt a documentary transfer tax on transfers of real property. It is computed at a set rate on consideration, with certain exempt transfers, and cities may adopt their own tax at half the county rate.

• ✓Rate is 55 cents per $500 of consideration (or fraction thereof)
• ✓Exempt if remaining lien/encumbrance reduces taxable consideration (must be stated)
• ✓Exempt transfers: inter vivos gifts, transfers by reason of death, proportional transfers into same-owned partnership
• ✓City tax may be adopted at one-half the county rate; county turns half over to the city
• ✓Notice of payment entered on the face of the deed or a separate recorded paper

Any material change in the subdivision or its marketing after filing/issuance must be reported to the Commissioner so the public report reflects true conditions.

• ✓A material change is anything that makes the public report or questionnaire not reflect true facts/conditions
• ✓The owner must report the sale of five or more parcels/units to a single purchaser
• ✓Amendments to management documents affecting owner rights materially are invalid without prior written Commissioner consent for a limited time (Code Section 11018.7)
• ✓Failure to report may furnish a basis for rescission of purchases through court action

The Commissioner may issue a D&R Order to stop violations or improper sales. The named person may request a hearing within 30 days, with strict timing rules for vacating.

• ✓The named person may file a written request for a hearing within 30 days after receipt
• ✓If a hearing is not commenced within 15 days after request, the D&R is deemed vacated
• ✓If the Commissioner's decision is not rendered within 30 days after completion of hearings, the D&R is deemed vacated
• ✓Requests are assigned to the Office of Administrative Hearings

The Commissioner denies a public report if statutory grounds exist; no sales may occur until conditions are remedied. Section 11018 lists grounds.

• ✓Grounds for denial are listed in Code Section 11018
• ✓Section 11018.5 applies only to common interest subdivisions and mandates issuance if standards are met and no other grounds exist
• ✓A subdivider objecting to a denial may request a hearing under Section 11018.3

Developers offering out-of-state subdivision interests in California must register (if within the U.S.) or include disclaimers, with different rules for foreign subdivisions.

• ✓Interests located outside California but within the U.S. must be registered with DRE with required disclaimers (except time-shares)
• ✓Interests located outside the United States require no DRE registration but must include a disclaimer
• ✓Disclaimers state DRE has not examined the offering and urge buyers to consult an attorney familiar with local law

Cost basis is the dollar amount assigned to property at acquisition for figuring gain, loss and depreciation. Adjusted cost basis is cost basis plus improvements minus depreciation. Capital gain is the amount by which net sale proceeds exceed adjusted cost basis; gains are short or long term and usually taxed at lower rates than ordinary income.

• ✓Adjusted cost basis = cost basis + improvements - depreciation
• ✓Capital gain = net sale proceeds - adjusted cost basis
• ✓Long-term capital gains are usually taxed at lower rates than ordinary income

Ad valorem means 'according to value' and is used in real estate taxation. Assessment is the valuation of property for levying tax or the tax amount; also HOA payments. An assessor determines assessed values. A general lien attaches to all a debtor's property; involuntary liens include taxes and special assessments.

• ✓Ad valorem taxes are levied 'according to value'
• ✓Involuntary liens include taxes, special assessments and income tax liens
• ✓A general lien attaches to all of a debtor's property

Accelerated Cost Recovery System (ACRS) figures cost recovery for depreciable real property placed in service after January 1, 1981. Accelerated depreciation allows greater allowances in early years. Declining balance depreciation (double declining balance is common) is an IRS-allowed accelerated method computed at double the straight-line rate.

• ✓Accelerated depreciation gives larger deductions in early years of ownership
• ✓Double declining balance is computed at double the straight-line rate
• ✓ACRS applies to depreciable real property placed in service after January 1, 1981

Leverage is using debt financing to maximize return per dollar of equity. Cash flow is net income before depreciation and other noncash expenses. Equity is the value an owner has over and above liens. Equity build-up increases through principal reduction and appreciation. A limited partnership has general partners who manage and limited partners liable only up to invested capital.

• ✓Leverage uses debt to maximize return on invested equity
• ✓Limited partners' liability is limited to their invested capital
• ✓Equity is the owner's interest above liens against the property

A listing agreement, like any contract, must contain the elements of a valid contract including competent parties, lawful object, and legally sufficient consideration. An unlawful object or unspecified consideration would invalidate it, and notarization is not required.

• ✓A valid contract requires competent parties, lawful object, consideration and mutual consent
• ✓A contract based on illegal consideration is void
• ✓Listing agreements need not be notarized to be valid

A quitclaim deed conveys only the present right, title and interest of the grantor, with no warranties.

• ✓A quitclaim deed conveys only the grantor's present interest
• ✓A quitclaim deed provides no warranties of title

A grant deed is recorded in the county where the property is situated, providing constructive notice.

• ✓A deed is recorded in the county where the property is located
• ✓Recording provides constructive notice to the world

As a neutral agent, the escrow holder is authorized to call for funding of the buyer's loan proceeds. The escrow holder does not order termite inspections, advise on financing, or amend commission instructions unilaterally.

• ✓The escrow holder is a neutral third party acting on written instructions
• ✓The escrow holder may call for funding of the buyer's loan proceeds
• ✓The escrow holder cannot give financing advice or unilaterally amend instructions

The California standard form title insurance policy insures against loss from a forgery in the chain of recorded title. It does not cover unrecorded liens, rights of parties in possession, or governmental regulation of use—those require extended coverage.

• ✓The standard title policy covers recorded defects such as forgery in the chain of title
• ✓It does not cover unrecorded liens, parties in possession or zoning/governmental actions
• ✓Extended (ALTA) coverage is needed for off-record risks

A contract based on an illegal consideration is void—it has no legal effect and cannot be enforced.

• ✓A contract with illegal consideration is void, not merely voidable
• ✓A void contract is unenforceable

A sublease is an instrument that usually transfers possession of real property but does not transfer ownership.

• ✓A lease/sublease transfers possession but not ownership
• ✓A trust deed and easement grant do not transfer possession like a lease

When a contingency is placed in a contract, it is important to be specific about the nature of the contingency, its duration, and the method by which it will be removed.

• ✓Contingencies should specify their nature, duration and removal method
• ✓Vague contingencies create disputes and may invalidate the contract term

Most contracts between a seller and broker for selling real estate take the form of a written agreement (listing), not a power of attorney, novation, or assignment.

• ✓Seller-broker listing contracts are written agreements
• ✓Listing agreements should be in writing to be enforceable under the statute of frauds

When a Realtist accepts a listing, he/she must give an honest, comprehensive valuation of fair market value to the owner. The Realtist shall be fair to all parties while promoting the client's interest. A Realtist shall not buy listed property or an interest therein without stating the facts to the client in writing prior to purchase, and shall not take commissions or rebates on expenditures without prior written authority.

• ✓A Realtist must give an honest comprehensive fair market valuation to the owner
• ✓A Realtist may not buy listed property without prior written disclosure to the client
• ✓No commissions or rebates on management expenditures without the client's prior written authority

Written exclusive listings should be encouraged to prevent misunderstandings and assure best service, unless contrary to the owner's best interest. If unable to render service, the Realtist should inform parties and return the listing. In appraisals, the Realtist should give a written opinion, may recover a fee, and must render an opinion without personal interest in the sale/lease result; possible employment should not affect the appraisal amount or honesty of opinion.

• ✓Written exclusive listings should be encouraged to prevent misunderstandings
• ✓An unable Realtist should inform parties, cancel, and return the listing
• ✓Appraisal opinions must be given in writing without personal interest in the outcome
• ✓Possible employment must not affect the amount of appraisal or honesty of opinion

Use of the word 'grant' in a fee conveyance implies covenants that the grantor has not already conveyed the estate and that the estate is free from undisclosed encumbrances made by the grantor. A grant deed is presumed to convey fee simple, and after-acquired title passes automatically to the grantee.

• ✓'Grant' implies the grantor hasn't already conveyed and there are no undisclosed encumbrances by grantor
• ✓A grant deed is presumed to convey fee simple unless a lesser estate appears
• ✓After-acquired title passes by operation of law to the grantee

Restrictions based on race, color, sex, religion, ancestry, national origin, age, disability, sexual orientation, marital status, familial status, or source of income are unenforceable under state and federal law. Documents with such covenants must carry a cover page/stamp stating they are unlawful, and a 'Restrictive Covenant Modification' may be recorded (Gov. Code 12955, 12956.1, 12956.2).

• ✓Discriminatory restrictive covenants are unlawful and unenforceable (Gov. Code 12955)
• ✓Documents must bear a cover page/stamp declaring such covenants unlawful and unenforceable
• ✓A recorder, title company, escrow, or licensee providing such documents must give a statutory notice of illegality

Restrictions limit the owner's free use of land, often as CC&Rs or a declaration. A covenant is a promise to do or not do something; a condition qualifies the estate granted. Conditions may be precedent (must occur before estate vests) or subsequent (breach lets grantor terminate the estate—a forfeiture).

• ✓A covenant is a promise; a condition qualifies the estate and can cause forfeiture
• ✓Breach of covenant remedy = damages or injunction; breach of condition = possible forfeiture of title
• ✓Since the law abhors forfeitures, courts construe ambiguous provisions as covenants unless intent to create a condition is plain

Covenants normally do not bind successors unless they 'run with the land'; conditions run with the restricted land indefinitely unless abandoned. Covenants/conditions that are unlawful, impossible, or in unreasonable restraint of alienation are void (e.g., condition against marriage, or requiring grantor consent to convey).

• ✓Some covenants 'run with the land' and bind successors; conditions run indefinitely with the land
• ✓A condition in restraint of alienation (e.g., no conveyance without grantor consent) is void
• ✓If a condition subsequent is void, title passes free of it; an impossible/wrongful condition precedent prevents title from passing

Developers record a 'declaration of restrictions' when creating a subdivision (common interest development); lot owners may then mutually enforce them. Homeowners' associations may amend restrictions consistent with law. Restrictions terminate by expiration, voluntary cancellation, merger, act of government, or changed conditions.

• ✓A declaration of restrictions is recorded when the subdivision is created and is enforceable among lot owners
• ✓Restrictions terminate by expiration, voluntary cancellation, merger, government act, or changed conditions
• ✓HOA amendments must be consistent with local government conditions and applicable law