CALIFORNIA REAL ESTATE PRINCIPLES

1. CALIFORNIA DIVERSITY a. b. c. d. e. f. g. h. Capitalism: an economic system in which most of the economys resources are privately owned and managed. California is the 8th largest economy in the world, and generates 13% of the US GDP. Net worth: the value of all assets minus all liabilities. Appreciation: increase in the market value of real estate Inflation: increase in the price of goods/services or decrease in purchasing power Affordability index: measures how many households can afford a median-priced home. Median home price: midway between most expensive and least expensive C.A.R. (California Association or REALTORS):trade association dedicated to the advancement of professionalism in real estate. i. ii. i. Realtor: someone who is a member of the association Real estate agent: someone whos licensed by the D.R.E.

List 3 major careers in R.E. i. ii. iii. iv. Management Finance Construction Brokerage

j.

Name 2 types of R.E. licenses i. ii. R.E. Sales person R.E. Broker

2.

PROPERTY, ESTATES, AND OWNERSHIP: Who owns this property, and Whats their interest in it?a. Bundle of rights (U.P.T.E.E.): i. ii. iii. iv. v. b. Use: right to use, within law, in any way or purpose Possess: right to live on property and keep others out Transfer: right to sell, give, or dispose of property Encumber: right to borrow against, or use as collateral Enjoy: right to peace and quiet enjoyment

Personal property vs. Real property i. ii. Personal aka chattel: moveable, and transferred/sold via Bill of Sale Real: immoveable, and is transferred/sold via Deed; anything permanently attached to the land 1. 2. 3. 4. Airspace, to a reasonable height Surface rights Mineral rights: gold, precious metals; unless theyre fugitive (non-solid, i.e.: gas, oil) Water rights: streams, underground water a. Under the Correlative-rights Doctrine, the owner may take only a reasonable share of the underground H2O b. c. Riparian Rights: property bordering a river/stream Littoral rights: property bordering a lake; owns up to the low water mark/edge of the lake d. e. iii. iv. For land bordering oceans, property owners own up to the ordinary high tide mark Appropriation: govt right to divert water for a beneficial use

Improvements: anything resting on the land to become permanent, i.e. pools, fences, garages, etc. Fixtures: anything thats permanently attached to real property. 1. 5 tests to determine a fixture (M.A.R.I.A.) a. Method of Attachment moveable or immoveable? i. ii. Fructus naturales: naturally occurring plant growth, i.e. grass Emblements: commercial groves/crops for annual harvest/sale

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iii. b. c. d. e. 2. Fructus indutriales: crops produced by human labor, i.e. corn Adaptation item specially made for property? Relationship of parties tenant/landlord; lender/borrower Intention what was the intent, and was it informed/written Agreement of the parties

Trade fixtures a. b. Personal property used to conduct a business, i.e. shelves, cabinets, refrigerators, etc. Tenants can retain this property, even though landlord owns it, but is responsible for repairing any damages that result from replacing them.

3.

Anything Appurtenant to the Land a. Appurtenance: anything used with the land for its benefit (belonging to), i.e. easements, stock rights to mutual water companies b. Easement: right of way across a parcel of land

c.

Types of Estates i. Estate: ownership interest or claim on real property 1. Freehold Estate a. b. c. d. Indefinite duration Can be sold or inherited Free from anyone elses restrictions Types i. Estates in Fee, aka (Fee Simple Estate or Estate of Inheritance or Perpetual estate) 1. An estate passed through inheritance or by will after owners death. 2. 3. Fee simple absolute: No conditions or limitations on use Fee simple qualified /defeasible: seller imposes qualifications or conditions that buyer must/must not do 4. Condition Subsequent: owner mustnt do something with that property a. 5. Penalty: property will go back to former owner

Condition Precedent: restriction/condition must occur before transaction becomes absolute and final

ii.

Life Estates: Limited in duration to the life of the owner or designated person (pur autre vie) 1. Has all rights that go with fee ownership except disposing of the estate by will 2. 3. Must pay taxes and maintain property May collect all rents and keep profits for the duration of the life estate 4. Types of Life Estates a. Estate in Reversion: A deeds estate to B. B dies. The estate then goes back to A. b. Reserving a Life Estate: A deeds estate to B for the life of C. When C dies, estate goes to D. c. Estate in Remainder: A deeds estate to B, with provision that when B dies, estate goes to C. Cs interest is called the Estate in Remainder.

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2. Less-than-freehold estate (aka Leasehold Estate): estate owned by a tenant who rents real property. a. Leasehold Estate aka Chattels real (lease/rental agreement) i. Moveable document describing temporary possession and use of the property PERSONAL PROPERTY b. c. Temporary and limited rights of use (lease), fixed amt of time Types of Leasehold estates i. ii. Estate for years: fixed term lease w/ definite end date stated Estate from Period to Period: periodic tenancy, i.e. month to month, 30-day notice to quit, and terminates by either party iii. Estate at Will: no written agreement between landlord and tenant, can be ended by unilateral decision, & 30-day notice must be given iv. Estate by Sufferance: tenant occupies property without paying rent or permission from landlord (squatters) d. Ownership of Real Property i. ii. iii. iv. v. Tenancy: mode or method of ownership or holding title to property Title: evidence that owner of land is in lawful possession Paramount title: right to real property that prevails over any other persons claim of title Separate Ownership (aka Ownership in Severalty): ownership by one person/entity Concurrent Ownership: co-ownership (4 types) 1. Tenancy in Common: 2 or more persons whose interests arent necessarily equal, but are owners of undivided interests in a single estate a. b. c. d. e. May take title at different times May take title on separate deeds May have unequal interests Have undivided interest or equal right or possession (one unity) Partition Action: asking the courts to decide fate of investment when the owners cant come to an agreement 2. Joint Tenancy: 2 or more parties own real property as co owners, with right of survivorship (meaning that if one of the joint owners pass, then the surviving owner automatically becomes sole owner of property). i.e. married couple a. Four Unities of Joint Tenancy: T-TIP (all 4 must occur) i. ii. iii. iv. 3. Time: all parties must become joint tenants at same time Title: All parties must take title on the same deed Interest: all parties have equal undivided interest in property Possession: All parties have equal right of possesion

Community Property: all property acquired during a valid marriage except for separate property a. Separate Property i. ii. iii. b. Property owned before marriage Property acquired by gift or inheritance Income derived from separate property

3 choices on taking title in CA as married couple i. Joint Tenancy 1. 2. ii. Right of survivorship May include a tax liability for surviving spouse

Community property 1. Right of survivorship

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2. Includes probate when spouse dies, and costs involved in that process iii. Community property with the right of survivorship, but no particular tax liability because of spouses death and no probate c. 4. Intestate Succession: if theres no will, spouse inherits all community property

Tenancy in Partnership: ownership by 2 or more persons who form a partnership for business purposes

Parties Interest Possession Death vi.

Joint Tenancy Any Number Must be equal Equal right Survivorship

Tenancy in Common Any Number Equal or unequal Equal right No Survivorship

Community Property Spouses Only Must be equal Equal right Survivorship (no will)

Partnership Any Number Mutual consent Equal right No Survivorship

Recording Safeguard Ownership 1. Acknowledgement a. b. before a notary public, or certain public official formal declaration by the person (grantor) who executed the instrument that he/she did in fact the execute the instrument 2. Recording Process a. b. c. copying the instrument to be recorded in proper index filing it in alphabetical order, under names of parties immediately To be valid, documents must be recorded by the county recorder in the county within which the property is located. i. ii. Marked filed for record Stamped with the proper time and date of recording and returned to the person who requested the recording. d. e. 3. Constructive Notice: public notice, i.e newspaper, news broadcast, etc. Actual Notice: direct, express information about the ownership interest of a property.

Priorities in Recording a. first one recorded takes precedence

3.

Encumbrances and Transfer of Ownership a. Encumbrances: an interest in real property that is held by someone other than the owner (ALL LIENS ARE ENCUMBRANCES, BUT NOT ALL EMCUMBRANCES ARE LIENS) i. MONEY ENCUMBRANCES 1. 2. 3. Voluntary lien: borrowing money, using the property as a security for the loan Involuntary lien: liens placed on property because owner has taxes or debt owed Specific lien: lien placed on a certain property, i.e. mechanics lien, trust deed, tax lien a. Mechanics lien: lien against property placed by anyone who supplies labor, services, or materials used for improvements on real property who didnt received payment for the improvements made i. ii. Must be verified and recorded Preliminary notice 1. Written notice given to owner within 20 days of first furnishing labor or materials for a job iii. Notice of completion 1. If owner records notice of completion within 10 days after project is finished, contractor has 60 days to file. All others have 30 days. iv. No notice of completion

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1. If owner doesnt record notice of completion when project is finished, then all claimants have 90 days to record mechanics lien v. Foreclosure action 1. After mechanics lien is recorded, the claimant has 90 days to bring foreclosure action to enfoce the lien. vi. Notice of Non-responsibility: 1. Unauthorized work on property must be recorded and posted on property to be valid, stating owners not responsible for work being done. Owner must record this notice within 10 days after discovering it b. Tax Liens: liens on property because of unpaid taxes i. c. d. Special assignments: taxes levied for specific local purposes

Lis Pendens: recorded notice pending litigation affecting title of property Attachment lien: aka writ of attachment, process by which the court holds the real or personal property of a defendant as security for a possible judgment pending outcome of lawsuit i. ii. iii. Judgment: final determination of the rights of parties in a lawsuit Abstract of Judgment: Court decision Writ of Execution: aka execution sale, court forced sale of a property to satisfy the judgment

4. ii.

General lien: lien on ALL properties of a debtor Easements: right to enter or use someone elses land for specific purpose a. b. c. Ingress: right to enter onto a property using easement Egress: Right to exit a property using easement Appurtenant Easement: An easement thats used for the benefit of the land i. ii. iii. d. Appurtenance: anything used for benefit of the land Servient tenement: person whos giving the easement to be used Dominant tenement: Person receiving the benefit of the easement

NON-MONEY ENCUMBRANCES: encumbrance that affects use of a property 1.

Easement in Gross: an easement thats not appurtenant to any one parcel, i.e. public utilities to install power lines

e.

Creating an easement i. ii. Express grant: grant by deed or express agreement Express reservation: seller of a parcel who owns adjoining land reserves an easement over the former property. iii. Implied Grant or Reservation: existence of an easement is obvious and necessary at time of conveyance, even though not mentioned in deed. iv. Necessity: easement made when parcel is completely landlocked and has no access

f.

Prescription: acquiring an interest, not ownership, of certain property i. Easement by Prescription (a specified interest in property): continuous and uninterrupted use by a single party for a period of 5 years 1. 2. 3. Must be against the owners wishes Be open and notorious Party claiming Easement by Prescription must have reasonable claim to use the property

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ii. Adverse Possession (Acquires title to the property): payment of taxes for 5 continuous yrs g. Terminating Easement (A.D.A.M. E. L.E.E.) Adam E. Lee i. Abandonment: Obvious and intentional surrender of the easement (after 5 years of non-use) ii. iii. Destruction of the Servient Tenement: Govt takes easement for its own use Adverse Possession: servient tenement owner prevents dominant tenement owner from using easement for 5 yrs iv. Merger: servient and dominant tenement owners are the same, i.e. servient tenement owner buys parcel next that used easement v. Express release: owner of dominant tenement is the one who can release an easement vi. Legal proceedings: owner of servient tenement brings action to quiet title against the owner of the dominant tenement 1. Quiet Title Action (aka Action to Quiet Title): a lawsuit to establish or settle title to real property vii. Estoppel: Non-use and the property owner has reason to believe that no further use is intended. viii. iii. Excessive use

RESTRICTIONS: limitations placed on the use of the property 1. Private restriction: restrictions place by a present or past owner and affect only a specific property or development a. CC&Rs: Covenants, Conditions, and Restrictions i. Covenant: A promise to do or not to do certain things 1. Penalties for a Breach a. b. ii. Money damages Injunction: court order to do/not do an act

Conditions: a promise to do/not do something (usually a limitation on the use of the property) 1. Penalties for a Breach a. 2. Return of the property to the grantor

Condition Subsequent a. A restriction placed in a deed at the time of conveyance, upon future use of the property. It is a condition thats placed on the property that comes into play subsequent to the transaction.

3.

Condition Precedent a. A restriction that a certain event, or condition, must occur before title can pass to the new owner.

iii.

Restrictions: limitations on use of property 1. Public restriction: (ZONING) promotes public health and general public welfare, i.e. R1, C1, M1 2. 3. Downzoning: changing from high density use to lower density use Non-Conforming: existing structures that are exempted from conforming to new regulations because of the grandfather clause, which allows the owner to continue to use the structures.

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If he wants to make changes to the property, then he has to comply w/ zoning laws. 4. Variance: an allowable difference to the zoning laws for a structure or land use 2. 3. Zoning (public restriction): government restrictions the benefit the public Encroachments: unauthorized intrusion on the adjoining land, limiting use and reducing size and value. iv. Homestead Protection 1. Homestead: limits the amount of liability for certain debts against which a home can be used to satisfy a judgment. Declaration of Homestead is the recorded document that protects a homeowner from foreclosure by certain judgment creditors. First $75,000 of homes value may not be used to satisfy judgment against head of household. $150,000 for mentally disabled or over 65, and $50,000 for all others 2. Requirements for Valid Homestead: Only one can be valid at a time a. b. c. d. v. Claimant must be living on the property at the time of the filing Must state his or her status as head of household or other Must describe the property Give an estimate of value

HOW REAL ESTATE IS ACQUIRED OR CONVEYED 1. Will: disposition of property after death a. b. c. d. e. f. Testator: a person who makes a will Testate: means the person who died left a valid will Devise: a gift of real property Bequest (aka legacy): a gift of money or personal property by will Codicil: Wills maker may change a will before death Witnessed Will: will thats usually prepared by an attorney and signed by the maker (testator) and two witnesses g. Holographic Will: will thats written in the makers writing, dated, and signed by the maker h. Probate: legal process to prove a will is valid, and to determine creditors claims and beneficiaries interested in an estate upon owners death i. Executor or Executrix: person named in a will that is appointed as a representative to handle the estate of the deceased ii. Administrator or Administratrix: Court appointed person who administers the estate because theres no will 2. Succession: legal transfer of a persons interests in real and personal property under the laws of descent and distribution. a. 3. Intestate Succession: inheriting property as a result of someones death without a will.

Accession: process by which there is an addition to property by the efforts of man or natural forces a. b. Alluvium: gradual build-up of soil Accretion: gradual build-up of soil by natural causes on property bordering rivers, lakes, or oceans c. d. e. Erosion: gradual wearing away of land by water, wind, or glacial ice Avulsion: sudden washing or tearing away of land by water action Reliction: when land covered by water becomes uncovered because of alluvial deposits along the banks of streams

4.

Occupancy: using property (squatting)

CALIFORNIA REAL ESTATE PRINCIPLES

a. b. c. Must be occupied without owners knowledge Cannot be publicly owned Three steps to acquire property by occupancy: i. ii. Abandonment Adverse possession: acquired through continued possession and payment of taxes (P.A.N.C.H.O.) 1. 2. 3. 4. 5. 6. iii. d. Possession must be actual occupation Adverse Notorious Continuous and uninterrupted for 5 yrs Hostile to the present owners title and wishes Open

Prescription

Transfer: property acquired when title is conveyed (transferred) from one person to another via a written document i. Real property may be transferred (alienated) by private grant, public grant, public declaration, or operation of the law (court action) 1. Private grant: transfer by written instrument (formal legal documents such as deed, will, or contract), i.e. grant deed, quitclaim deed, gift deed, warranty deed 2. Grant deed: written document that stransfers title to real property and must contain granting clause a. b. c. Grantor: person conveying the property Grantee: person receiving the property A grant deed must have a granting clause and has two implied warranties by the grantor: i. That the grantor has not already conveyed title to any other person ii. That the estate is free from encumbrances other than those disclosed by the grantor d. e. et ux: means and wife Requirements for a Valid Grant Deed i. Deed must be in writing, according to the statutes of frauds ii. Parties to the transfer must be sufficiently identified and described iii. Grantor must be competent to convey property iv. v. Grantee must be capable of holding title Property must be adequately described but doesnt require legal description vi. Words of granting such as grant or convey must be included vii. Deed must be executed by grantor (seller). Deed may be signed by a witnessed mark X

CALIFORNIA REAL ESTATE PRINCIPLES

viii. Deed must be delivered to and accepted by the grantee. Deed isnt effective until its delivered. ix. Acknowledgement: signed statement made in front of notary public that the named person is confirming that the signature on a document is genuine and was made of free will x. Constructive Notice: given notice by recording a document or taking physical possession of property xi. Chain of Title: sequential record of changes in ownership showing the connection from one owner to the next xii. Priority: first to record a deed is the first in right 3. Quitclaim Deed: transfers any interest at the time the deed is signed, but doesnt warranty clear title. Cloud on Title: any condition that might affect the clear title of real property or minor defect in the chain of title which needs to be removed. 4. Gift Deed: gift of property to a grantee, where the consideration is love and affection 5. Warranty Deed: deed used to transfer title, guaranteeing the title is clear and grantor has right to transfer it. (no longer used in CA) 6. Public Grant: transfer of title by government to private individual. Patent: document used by the govt to transfer title to land instead of using deed 7. Public Dedication: private property intended for public use a. Common Law Dedication: property owner implies through his or her conduct the intent that the public use the land. To be effective, it must be accepted by public use/local ordinance b. Statutory Dedication: dedication by private individual to the public, using Subdivision Map Act c. Deed: formal transfer by a party as in a gift deed where there is no consideration ii. Operation of Law: involuntary transfer of property 1. Foreclosure: legal process used by a lender to seize property of a homeowner, usually due to homemaker not making payments on the mortgage 2. Bankruptcy: court proceeding to relieve a persons or companys financial insolvency (debt exceeds assests) 3. Quiet Title Action: court proceeding to clear a cloud on the title of real property 4. Executions sale: forced sale under Writ of Execution (legal document used by courts to forcing sale to satisfy judgement) with proceeds to satisfy money judgment

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5. Partition Action: court proceeding to settle a dispute between coowners about dividing their interests in real property 6. Escheat: legal process in which property reverts to the state because the deceased owner left no will and has no legal heirs. State must wait 5 yrs to claim property 7. Eminent Domain: power of govt to take private property for public use after paying just compensation (fair and reasonable payment) to the owner a. Condemnation: acquiring private property for public use under 5th Amendment b. Inverse Condemnation: private party forces govt to pay just compensation if property value or use has been diminished by public entity

CALIFORNIA REAL ESTATE PRINCIPLES

4. Contracts: the Basics a. Contracts in General i. ii. iii. Express Contract: the parties declare the terms and put their intentions in words, either oral, or written. Implied Contract: agreement shown by act and conduct rather than words Bilateral Contract: agreement in which each person promised to perform an act in exchange for another persons promise to perform iv. Unilateral Contract: contract in which a party promises to perform without expectation of performance by the other party v. vi. vii. viii. ix. Executory Contract: contract in which obligations to perform exists on one or both sides Executed Contract: all parties have performed completely Void Contract: contract with no legal effect because of lack of capacity or illegal subject matter Voidable Contract: contract thats valid and enforceable on its face, but may be rejected by one or both parties Unenforceable Contract: Valid contract but for some reason cannot be proved by one or both of the parties Oral Agreements x. b. Valid Contract: binding and enforceable contract

Basic Elements of All Contracts i. Legally Competent Parties 1. 2. 3. Must be 18, unless married, in military, or declared emancipated by courts Mentally competent Power of Attorney: authority given to another person to act on behalf of another a. When dealing with real property, power of attorney must be recorded to be valid, and is good for as long as the principal is competent. It can be revoked at any time by recording revocation ii. Mutual Consent between both Parties (aka Meeting of the Minds) 1. 2. All parties mutually agree Genuine assent: offer and acceptance is genuine and freely made by all parties a. No Genuine Assent if: i. Fraud: act meant to deceive in order to get someone to part with something of value ii. Innocent Misrepresentation: unknowingly providing wrong information, where a contract may be rescinded or revoked by party that felt misled iii. Mistake: an agreement that was unclear or there was a misunderstanding in facts iv. v. iii. iv. Duress (or menace): use of force which is the threat of violence Undue Influence: using unfair advantage to get agreement

Offer: contractual intent of offeror to enter into a contract Acceptance: unqualified agreement to the terms of an offer 1. Counteroffer: rejection of original offer that becomes new offer

v.

Termination 1. 2. Lapse of time: revoked if the offeree fails to accept it within a prescribed period Communication of Notice of Revocation: notice is filed by the offeror anytime before the other party has communicated acceptance 3. 4. 5. 6. 7. Failure of offeree to fulfill a condition of acceptance prescribed by the offeror A qualified acceptance, or counteroffer by the offeree Rejection by the offeree Death or insanity of the offeror or offeree Unlawful object of the proposed contract

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vi. Sufficient Consideration 1. Consideration: something of value such as a promise of future payment, money, property, or personal services 2. Acceptable Consideration: terms that denote acceptable consideration include valuable, adequate, good, or sufficient consideration 3. Forbearance: forgiving a debt or obligation, or giving up an interest or a right, qualifies as valuable consideration c. Contracts that Must be in Writing i. Statute of Frauds: most contracts are required by law to be in writing, unless its a lease for less than a year 1. ii. d. Purpose is to prevent forgery, perjury, and dishonest conduct of unethical people

Parol Evidence Rule: Oral/word of mouth agreements

Discharge of Contracts: the cancellation or termination of a contract i. Performance: contract fully performed 1. Tender of performance: an offer by one of the parties to carry out his or her part of the contract, made at time to close escrow 2. 3. Waiver: relinquishment or refusal to accept a right Specific Performance: a court action brought about by one party to force the other (breaching) party to fulfill the conditions of the contract ii. Release: person whom an obligation is owed releasing the other party from the obligation to perform the contract iii. iv. Mutual Rescission: when all parties to a contract agree to cancel the agreement Assignment: transfer all the interests of the assignor to the assignee. Assignee takes over assignors rights, remedies, benefits, and duties in the contract. v. Novation: substitution, by agreement, of a new obligation for an existing one, w/ intent to extinguish the original contract vi. Breach: failure to perform on part or all of the terms and conditions of a contract 1. Remedies: a. Unilateral Rescission: Legal action taken to repeal a contract by one party when the other party had breached a contract b. c. Lawsuit for Money Damages Lawsuit for Specific Performance: forcing the breaching party to carry out remainder of contract according to agreed-upon terms, price, and conditions

e.

Statute of Limitations: set of laws determining civil action time limits prescribed by law i. ii. iii. 90 Days: civil action to recover personal property left at hotel or apt 6 Months: action against an officer to recover property seized in an official capacity 1 year: libel or slander, injury or death caused by wrongful act, or loss to depositor against a bank for the payment of a forged check iv. v. 2 years: action on a contract, not in writing; action based on a policy of title insurance 3 yrs: Action on a liability created by statute; action for trespass on or injury to real property (i.e. encroachment); action for relief on the grounds of fraud or mistake; attachment vi. vii. 4 yrs: action on any written contract; includes most real estate contracts 10 yrs: action on a judgment or decree of any court in the US

5.

AGENCY RELATIONSHIPS a. Agency: legal relationship in which principal authorizes an agent to act as the principals representative when dealing with third parties. i. Fiduciary relationship: relationship that implies a position of trust or confidence. Agents are bound by agency acts in the best interests of the principal.

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ii. iii. Special Agent: agent employed to perform a specific task General Agent: agent authorized by a principal to perform any and all tasks associated with the continued operation of a particular project iv. v. vi. vii. b. Actual authority: express authority given by principal or given by the law and not denied by the principal Power of Attorney: written document that gives a person legal authority to act on another persons behalf Special Power of Attorney: authorizing an agent to do certain specific acts General Power of Attorney: allows agent to transact all the business of the principal

Agency Relationships in Real Estate: i. ii. iii. The agent is always a licensed real estate broker Listing Agent: broker who obtains a listing from a seller to act as an agent for compensation Subagent: Broker delegated by the listing agent (if authorized by seller) who represents the seller in finding a buyer for the listed property iv. v. vi. vii. Buyers Agent: broker employed by the buyer to locate a certain kind of real property Dual Agent: broker acting as agent for both the seller and buyer in the same transaction Selling Agent: broker who finds a buyer and obtains an offer for the real property Cooperating Broker: selling agent who assists another broker by finding a buyer Agent (Broker) Listing Agent Subagent Buyer's Agent Selling Agent Cooperating Broker Dual Agent viii. Principal (Client) Seller Seller Buyer Seller or Buyer Seller or Buyer Seller & Buyer Third Party (Customer) Buyer Buyer Seller Seller or Buyer Seller or Buyer No Third Party

MLS (Multiple Listing Service): a cooperative listing service conducted by a group of brokers, usually members of a real estate association

ix.

Sales Associate (aka associate licensee): a licensed real estate salesperson or broker whose license is held by an employing licensed broker.

c.

Disclosing the Agency Relationship i. Agency Relationship Disclosure Act: law that requires an agent supply a written document, called Disclosure Real Estate Agency Relationship, explaining the nature of agency. Disclosure must be made PRIOR to taking a listing or writing an offer. 1. Basic requirements: a. Fiduciary duty of utmost care, integrity, honesty, and loyalty in dealing with the agents principal b. c. d. Reasonable skill and care in performance of agents duties Duty of honesty, fair dealing, and good faith Duty to disclose all facts known to the agent materially affecting the value or desirability of the property not know to the other parties. ii. Disclosure Process (D.E.C.) 1. Disclose: all parties are made aware that they do have a choice of who is to represent them as their own agent 2. 3. Elect: all parties involved to confirm that they understand they agents role Confirm: all parties to the transaction are required to acknowledge that they understand who is representing whom, and sign the agency confirmation form

d.

Creating an Agency Relationship

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i. Agreement 1. Must be in writing to be enforceable in the court of law. Two most common are: a. Listing Agreements: written contract by which a principal, or seller, employs a broker to sell real estate. MOST COMMON WAY i. ii. iii. Unilateral: Promise for an action Bilateral: Promise for a promise Seller agrees to pay a commission upon presentation of a ready, willing, and able buyer who meets all the terms of listing, aka meeting of the minds iv. Types of Listing Agreements (RLA, RLAA, and RLAN) 1. RLA (Residential Listing Agent) aka Exclusive Authorization and Right to Sell Agreement: Agent has EXCLUSIVE right to sell. Seller must pay listing broker a commission if the property is sold within the time limit by the listing broker, any other broker, or even by the owner. Broker gets commission regardless of who sold it 2. RLAA (Residential Listing Agreement-Agency) aka Exclusive Agency Listing Agreement: Exclusive agency where the seller must pay the listing broker a commission if any broker sells the property. Broker gets commission unless seller sells property without a broker 3. RLAN (Non-Exclusive (OPEN) Agency Residential Listing Agreement: Open Listing that gives any number of brokers the right to sell the property. First to secure buyer and meet terms, and whose offer is accepted gets the commission. That agent is known as the procuring cause: broker who produces buyer whos ready, willing, and able to purchase property for the price and terms specified by seller, regardless of whether the sale is completed 4. Net Listing: listing in which the commission is not definite broker get all proceeds over the asking price 5. Option Listing: listing gives the broker the right to purchase the property thats listed b. Buyer Representation Agreement: same as the listing agreement is to the seller, the buyer representation agreement is to the buyer. Its the Exclusive Right to Represent the Buyer Agreement ii. Ratification: the approval of a previously authorized act, performed on behalf of a person, which makes the act valid and legally binding. Basically, the agent does something that the principal agrees to and uses the benefit iii. Estoppel (Ostensible or Implied Agency): legal bar that prevents a person from asserting facts or rights that are not consistent with what was implied by the persons previous behavior. Principals actions create agency through their behavior. Doctrine of Estoppel i.e. seller allows buyer to believe broker is representing seller, and buyer believes it, then existence of agency cannot be denied. e. Terminating an Agency Relationship: principal has right to revoke at any time, but without good reason, seller might be liable for breach i. ii. iii. iv. v. Full performance Expiration of its term Agreement of the Parties Acts of the parties Destruction of the property

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vi. vii. f. Death, incapacity, or insanity of the broker or principal Bankruptcy of the principal

Obligations an Agent owes to a Principal i. ii. Loyalty and confidentiality to the principal Agent is a fiduciary, and may not personally profit from the agency relationship, except on agreed-upon commission. iii. Agent is bound by law to show good faith, loyalty, and honesty to principal (C.O.A.L.D) 1. 2. 3. 4. 5. iv. Care Obedience Accounting Loyalty Disclosure

Broker must present all offers to his or her principal before closing unless expressly instructed otherwise or unless offer is patently frivolous

v.

Listing Violations 1. 2. 3. Every exclusive listing must specify a definite termination date Listing broker must give copy of the listing to seller at the time the seller signs it Listing broker cannot accept a deposit from a buyer unless specifically authorized to do so in the listing agreement 4. Acceptance of a check, rather than cash or promissory note, as an earnest money deposit must be disclosed to the seller at the time the offer is presented 5. If buyer instructs the listing broker to hold the check uncashed until the offer is accepted, the fact must be disclosed to the seller when the offer is presented 6. Commingling: illegal practice of depositing clients funds in a brokers personal or general business acct. Conversion: broker using clients money

g.

Duties an Agent Owes to Third Parties i. Fair and honest dealing to the buyer, including full disclosure, which means the listing broker conducts a reasonably competent and diligent inspection of the property and note anything that would affect its value or desirability. ii. May not hold back any material facts that are known to the seller or broker from a prospective buyer. Material facts: any fact that would seem likely to affect the judgment of the principal in giving consent to the agent to enter into the particular transaction on the specified terms. iii. Misrepresentation: making false statements or concealing material fact 1. Innocent misrepresentation: statements not known to be untrue at the time they are made, and usually carry legal liability for an agent. However, buyer/seller can cancel contract as a result 2. Negligent misrepresentation: untrue statements made without facts to back them up. Agent is unaware of the falseness of statement at the time, but is liable for them 3. Fraudulent misrepresentation: untrue statements made by agent who knows the he/she is not telling the truth. Agent may be liable for committing fraud a. b. Puffing: statement of opinion that is not factual about the property Tort: violation of a legal right, or civil wrong, such as negligence, libel, or nuisance. Agent not responsible for sellers torts, just his/her own.

h.

Duties a Principal owes an Agent i. Seller cant be forced to sell even after signing agreement, but they can be forced to pay the commission if broker finds buyer thats ready, willing, and able (buyer and seller have meeting of the minds)

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ii. Negotiating the commission: The amount of commission is not set by law and is ALWAYS negotiable between sellers and brokers. Its a violation of the Sherman Anti-Trust Law for brokers to discuss or set commission rates in a community. iii. Commissions earned when: 1) agent produces a ready, willing, and able buyer to purchase on the terms and at the price asked by the seller, and 2) agent secures from a prospective buyer a binding contract with terms and conditions that are accepted by the seller iv. Safety Clause: protects the brokers commission, if the owner personally sells the property to someone who was shown the property or made an offer during the term of the listing 6. REAL ESTATE CONTRACTS a. Offer to Purchase: Residential Purchase Agreement and Joint Escrow Instructions, aka deposit receipt or purchase offer i. This acts as the receipt that earnest money given by the buyer to secure an offer between seller and buyer. Once all parties execute, or sign, the deposit receipt becomes bilateral contract ii. This is basically the playbook of the transaction and must include the following: 1. 2. 3. Date of the Agreement Names and addresses of the parties to the contract Description of the property a. Statutory disclosure: giving buyer several disclosures about property and surrounding area, which might affect buyers decision to purchase property b. Title and vesting: review preliminary title to check for undisclosed liens or easements that might affect use of property. Vesting: the way a person takes title 4. The consideration or price a. b. Personal property included or excluded from sale?? Liquidated damages: agreed-upon predetermined amount of damages to be paid should either party breach contract 5. 6. Financing and terms: hows everything being paid, and who pays what (allocation of costs) Date and place of closing a. Date seller turns over property, and if buyer is allowed to take possession of the property prior to close of escrow b. c. Interim Occupancy Agreement: if buyer wants early possession of the property Prorations: clause telling escrow the buyers and sellers wishes regarding the prorations (allocations) of property tax, interest, assessments, and any other charge normally prorated in escrow 7. iii. iv. Signatures of buyer and seller (must have delivery to be enforced)

Time is of the Essence Expiration of the Offer: offer not accepted within the time frame, offer is revoked and any deposit is returned to buyer

v.

Acceptance of the Offer: once deposit if accepted and signed by seller, it becomes legally binding, and cannot be

vi.

Termination of offer 1. 2. 3. Buyer withdraws before seller accepted offer The time limit is over Seller counteroffers a. Counteroffer: the rejection of an original purchase offer and the submission of a new and different offer. Original offer is automatically terminated b. Option: a contract to keep open, for a set period of time, an offer to purchase or lease real property. Optionor: person who owns property (seller) Optionee: person who wants to purchase or lease property (buyer)

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i. For the option to be valid, it must be in writing and must have actual monetary consideration paid to the owner (optionor) ii. Options restricts the rights of the seller (optionor) because he/she cant sell or lease property during the option period <unilateral> iii. b. The buyer (optionee) is the only one that has a choice

Leases: a contract between an owner (lessor), and a lessee (tenant) which give the tenant tenancy (interest of a person holding property by any right or title. i. Owner allows another to take exclusive possession of land in consideration of rent. The lessors interest is called a leased fee estate ii. iii. Reversionary Right: the right of the landlord to reclaim the property Lessee has the use, possession, and the right of quiet enjoyment of the property for the duration of the lease. Lessees interest is called a less-than-freehold estate iv. Requirements of a lease (L.A.N.D.) 1. 2. 3. 4. v. vi. vii. viii. ix. x. xi. xii. xiii. Length of time Amount of rental payments Names of parties Description of the property

If lease is for more than 1 yr, it must be in writing Signed by LESSOR, Lessee doesnt have to sign lease Reversionary rights belong to lessor Possessory rights belong to lessee Rental is presumed month-to-month, unless specified otherwise Agricultural leases are limited to maximum of 51 yrs Urban leases limited to max of 99 yrs Mineral, oil, and gas leases are limited to max of 99 yrs Classifications of Leases: Generally classified in 3 ways: 1) type of real estate, 2) length of time, and 3) method of payment 1. Types of Real Estate a. b. Ground lease: a lease for only the land Proprietary lease: used in co-op apt buildings. Lessee is also a stockholder in the corporation that owns the building. c. 2. Residential lease: used for all residential property including SF, MF, and duplexes

Length of time a. b. Short-term. i.e. apt leases Long-term: multiple renewal rights

3.

Method of Payments a. Gross lease (aka flat, fixed, or straight lease): tenant pays an agreed-upon sum as rent and the landlord pays any other expenses, such as taxes, maintenance, or insurance b. Net lease: tenant pays an agreed-upon sum as rent, plus certain agreed-upon expenses per month. BENEFIT: lessor creates fixed income c. Percentage lease: tenant pays a percentage of gross monthly receipts in addition to the base rent

xiv.

Rent and Security Deposits 1. Rent is for the use of the property a. b. Adjustments in rent are tied to increases in Consumer Price Index, stays up w/ inflation Landlord may not require rent to be paid in cash, unless tenant has defaulted on the rent. And even then, can only require up to 3 months to be paid in cash

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2. Security Deposit: money given to landlord to prepay for any damages that might occur to a property during a lease term that is more than just normal wear and tear a. b. c. d. Maximum deposit allowed on unfurnished property may not exceed 2 months rent Maximum deposit allowed on furnished property may not exceed 3 months rent Security deposit must be refundable Landlord has 21 days after tenant moves out to return all unused portions of the security deposit, with a written statement showing how the remainder was used e. Landlord may only deduct from security deposit the cleaning cost necessary to return unit to the same level of cleanliness it was in the beginning of the tenancy f. Landlord who keeps deposit for more than 3 wks after tenant moves out without reason is subject to damages up to $600 3. Responsibility of a Landlord a. Landlord guarantees that health and safety codes are met. Landlord is usually liable for injuries occurring due to unsafe condition in common areas. i. Implied Warranty of Habitability: property will be maintained to meet bare living requirements b. Periodic inspection of the property is allowed, but landlord must give reasonable notice of intent to enter, and only during normal business hrs. 24 hrs is reasonable notice, but it varies depending on whats on the lease c. d. Obey federal and state fair housing laws CA renters under month-to-month leases must give 30-day notices to move out. i. Retaliatory eviction: eviction that occurs in revenge for some complaint made by tenant e. Tenants have the right to a PRE-MOVE-OUT Inspection of rental property, no earlier than 2 wks prior to the termination of tenancy. Landlord must give tenant itemized statement listing any proposed repairs or cleaning. f. Landlord has 21 days after tenant moves out to return all unused portions of the security deposit, with a written statement showing how the remainder was used g. Unlawful Acts by a Landlord (Lessor) i. ii. iii. iv. v. h. Tenant Lockout Taking Tenant Property Removing Doors and Windows Shutting Off Utilities Trepassing

Right of Replevin: tenant has the legal right to recover personal property unlawfully taken by the landlord

4.

Responsibilities and Rights of a Tenant a. b. Tenant must pay rent when its due Must give proper written notice before moving out, unless otherwise agreed-upon. Notice is based on the number of days between rent payments, i.e. tenant who pays monthly must give 30-days notice, and a weekly tenant must give 7-days notice. c. d. May not interfere with the rights of other tenants Tenant may spend up to one months rent to make repairs to problems, if landlord refuses, and deduct that portion from the monthly rent. i. ii. Can only do this two times in any 12-month period Landlord cannot retaliate by eviction or raising rent for 180 days after this offset is used to make lawful repairs

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xv. Transfer of a Lease 1. Assignment: transfer of the entire leasehold estate to a new person (assignee). Original lessee steps out of primary responsibility of lease, and assignee becomes primary now. 2. Sublease: transfer possession of a leased property to a new person (sublessee) a. b. Original tenant (sublessor) is still primarily liable for paying rent to owner Sublessee is only liable to the sublessor, which is called a sandwich lease: the position in between the original lessor and the sublessee xvi. Termination of Lease 1. 2. 3. Mutual agreement between the landlord and tenant Destruction of property Breach of conditions by either lessor or lessee a. 4. Eviction-Steps in the Eviction Process: a. b. c. d. e. Notice to pay or quit served (aka eviction notice) Tenant has 3 days to respond Unlawful detainer filed Tenant has 5 days to respond after being served Writ of Possession granted: authorization given to sheriff, granted by court to the landlord if the tenant does not move out or answer lawsuit, to send an eviction notice to the tenant. f. 5. 7. Sheriff sends eviction notice and physically removes tenant if no response within 5 days

Surrender: when tenant voluntarily gives up a lease before the expiration of its term

DISCLOSURES IN REAL ESTATE a. Disclosures required in real estate transfer i. Required to discuss and complete the Agency Relationship Disclosure form at the first meeting with potential sellers and buyers, allowing them to determine who will represent them, and if theres a conflict of interest ii. iii. Agents have duty of FULL disclosure Red Flag: something that alerts a reasonably observant person of potential problems 1. Broker has duty to inspect property and disclose any material facts affecting value. Material facts include: a. Age, condition, and any defects or malfunctions of the structural components and/or plumbing, electrical, heating, or other mechanical problems b. c. d. e. f. g. h. 2. Easements, common driveways, or fences Room additions, structural alterations, repairs, replacements, etc. Zoning violations HOA obligations and deed restrictions or common area problems Citations against property Location of property within known earthquake zone Major damage from fire, earthquake, or landslide

No property may be sold as-is without complete disclosure of any known/should-have-known and obvious problems

iv.

Transfer Disclosure Statement (TDS): document that the seller must provide to any buyer of residential property (1-4 units), detailing what the seller knows about the condition of the property, and must list all known defects as well as potential problems that might affect property value 1. Transfers exempt from the disclosure requirement a. b. Transfers pursuant to court orders Foreclosure sales

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c. d. e. f. g. h. i. Court ordered by fiduciary in the administrations of a probate estate or testimony trust Transfers to spouse or another related person as a result of dissolution of marriage Transfers from one co-owner to another Transfer by state controller for unclaimed property Transfers as a result from failure of unpaid taxes Transfers from or to any government entities Transfer of the first sale of a residential property within a subdivision and a copy of a public record is delivered to the purchaser v. Environmental Hazard Disclosure: requires sellers to disclose whether they are aware of the presense of hazardous substances or materials, i.e. asbestos, formaldehyde, rado gas, lead-based paint, fuel, or chemical storage tanks, contaminated soil, water, or mold 1. Prop 65: certain businesses may not knowingly or intentionally expose any individual to a cancercausing chemical or reproductive toxin without first giving clear, reasonable warning to such individuals. vi. vii. Window Security Bars Disclosure: seller must disclose of any bars on windows, and if there are safety latches Mold Disclosure: No disclosure is required for toxic mold for the time being, but seller must disclose of actual mold on the property viii. Drug-Lab Illegal Controlled Substance: must inform buyer in writing of toxic contamination by illegal controlled substance on property, receipt of Dept of Toxic Substance Control, or another agency. $5,000 civil penalty can be enforced if seller knowingly didnt disclose ix. x. Industrial Use Disclosure: disclosure if property is affected by or zoned for industrial use of the property Military Ordinance Location Disclosure: seller must give buyer written notice ASAP before transfer of title if property is within 1 mile from military activities xi. Local Option Real Estate Transfer Disclosure Statement: disclosure about local conditions that might affect buyers use and enjoyment of residential property, i.e. zoning and use, local ordinances, building codes, etc. xii. xiii. Mello-Roos Ordinance Disclosure: disclosure that property is in an area where a special tax is imposed Lead Paint Disclosure: mainly for homes built before 1978 1. Seller/landlord obligations: a. b. Give protect your family from lead in your home pamphlet Disclose all known lead-based paint and paint hazards in the dwelling, and provide buyer with any available reports c. d. e. f. 2. Include standard warning language as attachment to contract/lease Complete and sign statement verifying completion of requirements Retain signed acknowledgement for 3 yrs Give buyers 10 day opportunity to test for lead

R.E. Agent responsibilities a. b. c. d. Make sure seller/landlord is aware of obligations Make sure seller/landlord disclose proper info to buyer/tenants Make sure leases/contracts include proper disclosure language/signatures Make sure seller gives buyer opportunity to conduct inspection for 10 days or mutually agreed-upon timeframe

xiv.

Natural Hazard Disclosure Statement: agent must give prospective buyer a separate Natural Hazard Disclosure Statement (NHD) if residential property lies within any of the 6 statutorily specified areas: 1. 2. 3. Special flood zone: designated by Federal Emergency Management Agency (FEMA) Designated Area of potential flooding: in event of dam failure, designated by CA Office of Emergency Services Very high fire hazard severity zone: designated by CA Dept of Forestry and Fire Protection (CDF). Requires 30 ft clearance around dwelling.

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4. Designated wild land fire area: designated by State Board of Forestry, may contain substantial forest fire risks and hazards 5. Earthquake fault zone: designated by State Geologist a. 6. xv. Fault creep: caused stress and/or earthquake shaking

Seismic hazard zone: designated by State Geologist

Megans Law: statutorily defined notice regarding the existence of public access to database of sex offenders in the neighborhood

xvi.

Death and/or AIDS: 1. Stigmatized Property: property thats been psychologically impacted by an event which occurred, or suspected to have occurred, on the property 2. Neither agent nor seller has to disclose if theres a death at the property 3 yrs prior to the current date, but must be honest about deaths when asked 3. Neither agent nor seller has to voluntarily disclose whether or not a person was afflicted with or death from AIDS on the property

xvii.

Disclosing in Financing 1. Real Estate Settlement Procedures Act (RESPA): federal law requiring disclosure to borrowers of settlement (closing) procedures and costs by means of a pamphlet and forms prescribed by the US Dept of Housing and Urban Development 2. Truth-in-Lending Act (Reg Z): federal law requiring borrowers to be informed about the cost of borrowing money

b.

Subdivision Disclosure i. Subdivided Lands Law: law designed to protect buyer from fraud, misrepresentation, or deceit in the marketing of subdivided lots, parcels, units, and undivided interests in new subdivision ii. Before any subdivision can be offer for sale in CA, the R.E. Commissioner must determine that the offering meets certain standards and issue a public report. The report must be give to the prospective buyer for approval. Seller must keep copy of report for 3 yrs. Report is valid for 5 yrs 1. iii. Violation: max of $10,000 or imprisonment of up to 1 yr, or both

Public Report: document disclosing all important facts about the property, its marketing and the financing of the subdivision 1. Preliminary Public Report a. b. Allows developer to take reservations for the project Developer cannot accept any non-refundable money or enter into any binding contracts until receiving final report from Commissioner c. One yr term and may be renewed

iv.

Interstate Lands Sales Full Disclosure Act: law regulating land sales when there are two or more states involved. 1. Subdividers must conform to this law if they have 50 or more lots in one state and want to sell them in another state. 2. Public report from HUD (US Dept of Housing and Urban Development) must be given to each prospective buyer as protection from less-than-truthful advertising in far-away places.

v.

Smoke Detector Statement of Compliance: seller must provide the buyer with a written statement representing that the property is in compliance with CA law regarding smoke detectors 1. CA mandates that all existing dwelling must have a smoke detector in a central location outside each sleeping area. At least 2 smoke detectors in a 2-story home. New construction requires a smoke detector in each rm.

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vi. Certification Regarding Water Heaters Security against Earthquakes } 1/3 } 1/3 } 1/3 } 18 off floor vii. Energy Conservation Retrofit and Thermal Insulation Disclosures: state prescribes minimum conservation for all new construction viii. Foreign Investment in Real Property Tax Act (FIRPTA) 1. Buyer is responsible for making sure either the proper disclosures have been made and/or the proper funds have been set aside 2. Federal law requires that a buyer of real property must withhold and send to the IRS 10% of the gross sales price if the seller of property is a foreign person 3. CA law requires that if property is sold by a non-citizen of the US, or resident of another state, the buyer must withhold 3 1/3% of the total sales price as state income tax and deliver the sum withheld to the State Franchise Tax Board ix. x. Home Inspection Notice: borrower must receive and sign the notice called the Importance of a Home Inspection Notice Regarding the Advisability of Title Insurance: buyer must receive and sign the notice as a separate document in the escrow, where no title insurance is to be issued xi. Disclosure of Sales Price Information: broker must inform both seller and buyer, in writing, the sale price on a property within one month of close of escrow Escrow Closing Statement meets this requirement xii. Commissions: a notice printed in 10-point type must be given to the person paying the Real Estate Commission that commissions are negotiable. Broker can share commissions w/ unlicensed person, but has to be disclosed to all parties 8. ESCROW AND CLOSING a. b. Escrow Agent: a neutral 3rd party handling the details of the sale when ownership transfers from one person to another Escrow Holder: a neutral agent of both seller and buyer that follows the directions of the principals, collects, and distributes documents and money as agreed upon in the purchase agreement. (escrow instructions are subsequent) c. d. Escrow: small and short lived trust arrangement Basic requirements for a valid escrow: i. ii. e. f. g. A binding contract between the buyer and seller Conditional delivery of transfer documents to a third party

The person who opens escrow is the selling agent Vesting: taking title; sole ownership, joint tenancy, tenants in common, tenancy in partnership Title search: searches the records for any encumbrances or liens against the property, checks to make sure the seller is the owner of record, and inspects the history of ownership, or chain of title. Purpose is to ensure that all transfers of ownership have been recorded correctly, there are no unexplained gaps, and there are no liens or encumbrances, which will not be released.

9.