National Real Estate Exam (PSI) flashcards

An antitrust violation where competitors agree to divide markets, territories, or customers to reduce competition.

• Violates Sherman Antitrust Act
• Distinct from steering (fair housing) despite similar sound
• Can involve geographic or customer-type division

Memory trick: Market allocation = drawing lines on a map to avoid competing

Prepaid interest charged by a lender to reduce the interest rate on a loan; each point equals 1% of the loan amount.

• 1 point = 1% of loan amount
• Paid at closing to buy down the rate
• More points typically mean a lower interest rate

Memory trick: Each point is one percent paid up front to push the rate down.

One of the essential elements of a valid contract; the objective of the agreement must be lawful, or the contract is void.

• Essential elements: offer & acceptance, consideration, capacity, mutual consent, legal purpose
• A contract for an illegal act is void, not merely voidable
• Void contracts have no legal effect and cannot be enforced by either party

Memory trick: 'OCCLP' — Offer, Consideration, Capacity, Legal purpose, Personal (mutual) consent

A property's history as a clandestine drug manufacturing site is generally considered a material fact requiring disclosure, even after professional remediation certifies the site meets decontamination standards.

• Many states have specific meth-lab disclosure statutes separate from general material fact rules
• Residual contamination (e.g., in walls, HVAC) can remain even after visible cleanup
• Remediation reduces liability/health risk but does not remove the disclosure duty
• Buyers may still value the property lower or decline due to stigma

Memory trick: Clean walls, dirty history—still tell the buyer.

A life estate measured by the lifetime of someone other than the life tenant; if the life tenant dies first, the estate passes to heirs until the measuring life ends.

• Measuring life is a third party, not the life tenant
• Interest is inheritable until the measuring life ends
• Remainder or reversion takes effect only when measuring life ends

Memory trick: The clock keeps ticking on someone else's life, even if the tenant dies first.

Improperly mixing client trust funds with a broker's personal or business funds in the same account.

• Violates real estate license law
• Trust funds require a separate account
• Can lead to license suspension or revocation

Memory trick: Commingling = funds 'coming together' when they shouldn't

Total commission is first split between brokerages, then each brokerage splits its share with its agent.

• Total commission = sale price × commission rate
• Split between brokerages first, then between agent and broker
• Work from the total down to the individual's share step by step

Memory trick: Total pie, cut in half, cut again for the agent

A promise in a general warranty deed that the grantor owns the property and has the legal right to convey it.

• One of several covenants in a general warranty deed
• Breached if grantor did not actually own the interest conveyed
• Distinct from covenants against encumbrances and quiet enjoyment

Memory trick: 'Seisin = 'I seize and own it — I can sell it to you.''

A zoning tool comparing total building floor area to lot size (FAR = total floor area ÷ lot area), used to limit building bulk and density.

• Maximum floor area = lot area × FAR
• Total floor area sums all stories' floor space
• Exceeding the FAR maximum requires a variance or redesign

Memory trick: FAR = Floor Area ÷ lot Area—multiply to find your max.

An acceptance must match the exact terms of the offer; any change constitutes a counteroffer, not an acceptance.

• A counteroffer terminates the original offer
• The original offeror becomes the offeree of the counteroffer
• No contract exists until unqualified acceptance occurs

Memory trick: No exact mirror, no deal — just a new offer.

Interest collected at closing to cover the period between the closing date and the start of the first full mortgage payment cycle.

• Mortgage interest is typically paid in arrears
• Lenders often use a 360-day year for calculations
• Daily interest = loan amount × rate ÷ 360 (or 365, depending on convention)

Memory trick: Loans charge interest 'behind,' so buyers prepay the gap days at closing.

When taxes are unpaid at closing, the seller's share of taxes owed for time they owned the property is credited to the buyer and debited from the seller.

• Daily rate = annual tax ÷ 365 (or 360, per local custom)
• Seller typically owes through day of closing
• Result is a buyer credit / seller debit at settlement

Memory trick: Arrears taxes: seller pays for time they held the property, credited to buyer.

When zoning ordinances and private deed restrictions conflict, the more restrictive requirement generally governs the use of the property.

• Zoning sets minimum public standards
• Deed restrictions are private agreements that can be more restrictive
• The stricter of the two applicable rules usually controls

Memory trick: Whichever rule ties your hands tighter wins.

An agent must obey the principal's lawful instructions, but never instructions that are illegal, fraudulent, or unethical.

• Obedience is one of the fiduciary duties (often OLDCAR)
• Does not override disclosure laws
• Agents can be liable for following unlawful instructions

Memory trick: Obey the law, not just the boss

A contract provision stating the written document is the complete and final agreement, superseding all prior oral or written negotiations and promises.

• Also called an integration clause
• Prevents parties from claiming outside promises are part of the deal
• Common in purchase agreements and leases

Memory trick: Merger clause merges all talk into one final page.

Federal law requiring lenders to automatically cancel private mortgage insurance once the loan balance reaches 78% of the home's original value.

• Governed by the Homeowners Protection Act of 1998
• Borrower can request cancellation earlier at 80% LTV
• Applies to conventional loans, not FHA loans

Memory trick: 78 is the magic number that sets PMI free.

A non-exclusive listing agreement allowing a seller to list with multiple brokers, paying commission only to whichever broker procures the buyer.

• Seller can list with unlimited brokers simultaneously
• No commission owed if seller finds their own buyer
• Least protective listing type for brokers

Memory trick: Open listing, open door — many brokers, one gets the reward.

The substitution of a new party for an original party in a contract, with the consent of all parties, which fully releases the original party from liability.

• Requires agreement of all original and new parties
• Fully releases the original party (unlike assignment)
• Common in complex real estate or business transactions
• Different from assignment, which retains secondary liability

Memory trick: Novation = 'Novel' new party fully replaces old, no strings attached

The fiduciary duty requiring an agent to properly handle, safeguard, and report all funds and documents received on behalf of the principal.

• Includes trust account management
• Requires timely, accurate financial reporting
• Part of the fiduciary duties (often OLD CAR)

Memory trick: Accounting = Adding it all up

To find total sale price of land priced per square foot, multiply the area (length × width) by the price per square foot.

• Area = Length × Width
• Total Price = Area × Price per Sq Ft
• Always confirm units match (feet, sq ft)

Memory trick: Multiply the box, then multiply by the price tag.

An illegal agreement between competing brokers to set uniform commission rates or fees.

• Violates Sherman Antitrust Act
• Commissions must always be negotiable
• Even informal or implied agreements can be illegal

Memory trick: Price fixing = 'fixed' prices, no room to negotiate

A subagent owes fiduciary duties to the seller, and the listing broker who offers subagency can be held vicariously liable for the subagent's misconduct.

• Subagent works for the seller, not the buyer
• Vicarious liability extends up to the listing broker
• Many brokerages now avoid offering subagency to limit this risk

Memory trick: Chain of duty, chain of liability

A principal's after-the-fact approval of an unauthorized act performed on their behalf, making the act legally binding.

• Can be express (written/verbal) or implied by conduct
• Retroactively validates the unauthorized act
• Differs from agency by estoppel, which protects third parties relying on appearances

Memory trick: Ratify = Retroactive Yes

A loan with payments calculated on a longer amortization schedule than the actual loan term, resulting in a large final lump-sum payment.

• Payments are lower than a fully amortized loan of the same term
• Remaining balance due in full at maturity
• Common in short-term commercial or seller financing

Memory trick: Payments stay small until the balloon pops with one big payment.

The Real Estate Settlement Procedures Act prohibits giving or accepting fees, kickbacks, or anything of value for referrals of settlement service business.

• Applies to federally related mortgage loans
• Requires disclosure via Loan Estimate and Closing Disclosure
• Violations can result in fines and criminal penalties

Memory trick: RESPA says no paying for pushing people to a particular provider.

Any document, claim, unreleased lien, or encumbrance that casts doubt on the validity of a property's title, making it unmarketable until resolved.

• Common causes include unreleased mortgages, liens, or errors in prior deeds
• Often resolved through a quiet title lawsuit
• Must typically be cleared before title insurance will be issued without exception

Memory trick: A 'cloud' blocks the sunshine of clear ownership until a quiet title suit clears the sky.

A federal law prohibiting credit discrimination based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance income.

• Enforced by the Consumer Financial Protection Bureau
• Covers all types of credit, not just mortgages
• Requires lenders to notify applicants of denial reasons

Memory trick: ECOA: Everyone's Credit is Open Access.

When a seller has prepaid taxes for the year, the buyer reimburses the seller for the portion of the year the buyer will own the property.

• Divide annual amount by 12 for monthly rate
• Count remaining months after closing date
• Buyer owes seller when seller prepaid

Memory trick: Prepaid means buyer pays seller back for future months

A transaction in which an owner sells a property and simultaneously leases it back from the buyer, converting equity into cash while retaining occupancy.

• Seller becomes the tenant immediately after closing
• Often used by businesses to raise capital from real estate assets
• Buyer becomes the landlord/investor collecting rent

Memory trick: 'Sell it, then dwell in it' — sale-leaseback lets you cash out and stay put

Money paid by an optionee to hold an option open, which may or may not be credited toward the purchase price if the option is exercised, per the agreement's terms.

• Option consideration is required for a valid option
• If exercised, agreement may credit the fee to purchase price
• If not exercised, the option holder typically forfeits the fee
• Terms of crediting must be clearly stated in the contract

Memory trick: Credit means 'take it off the top' of the final bill

An agency agreement automatically terminates when the property that is the subject of the agreement is destroyed, making the purpose of the agency impossible to fulfill.

• Occurs automatically, no notice required
• Similar to other terminations by operation of law
• Applies when performance becomes impossible

Memory trick: No house, no listing — destruction ends the deal instantly.

A lease in which rent increases at scheduled intervals over the lease term, often used in long-term commercial leases to account for anticipated cost increases.

• Rent increases are predetermined and stated in the lease, not tied to sales or index
• Calculate total rent by summing each period's monthly rent times number of months
• Differs from a percentage lease, which ties rent to tenant revenue

Memory trick: 'Step up, add it up' — break the lease into rent tiers, multiply by months, then total

Interest earned on client trust account funds does not belong to the broker; state law typically directs it to the client or to an IOLTA-style public interest fund.

• Brokers may not personally retain trust account interest
• Many states use IOLTA programs to fund legal aid or housing programs
• Improper use of trust interest can be treated similarly to commingling or conversion

Memory trick: Interest on client money is never the broker's money.

An arrangement where a broker appoints separate salespersons within the same firm to represent the buyer and seller individually, each owing full fiduciary duties to their assigned client.

• Reduces conflicts inherent in dual agency
• Each designated agent owes full loyalty to their own client
• Must typically be authorized by state law and disclosed

Memory trick: Designated = each gets their own dedicated agent

An adjustable-rate mortgage's interest rate is calculated by adding a fixed margin to a fluctuating index rate.

• Index reflects market conditions and changes periodically
• Margin is a fixed percentage set by the lender
• Rate = Index + Margin

Memory trick: Index plus margin equals what you'll actually pay.

Compound appreciation applies a percentage increase to the previous year's ending value, not the original value, each period.

• Year 2 value = Year 1 value × (1 + rate)
• Compounding differs from simple interest, which uses original principal each year
• Small rate differences compound significantly over time

Memory trick: Grow on last year's total, not the original price.

A federal permit required from the U.S. Army Corps of Engineers before dredging or filling wetlands or other waters of the United States.

• Governed by the Clean Water Act
• Issued by the U.S. Army Corps of Engineers
• Required before any wetland fill or dredging activity for development

Memory trick: Fill a wetland? Call the Corps for a 404.

An agent given unlimited authority to act on the principal's behalf in all matters, personal and business.

• Broadest type of agency authority
• Often created by comprehensive power of attorney
• Contrasts with special (one task) and general (specific business) agents

Memory trick: Universal = Unlimited

A deed that conveys only the grantor's current interest in property, if any, without any warranties of title.

• Offers no protection to the grantee
• Commonly used to clear title defects or between family members
• Does not guarantee the grantor even owns the property

Memory trick: Quitclaim = 'I quit claiming, take my rights as-is.'

An offeror may withdraw an offer at any time before it is accepted, unless the offeree has paid consideration to hold the offer open (an option).

• Offers are freely revocable before acceptance unless supported by consideration
• A stated time period alone does not make an offer irrevocable
• Option contracts require consideration to bind the offeror to keep the offer open

Memory trick: 'No pay, no stay' — without consideration, an offer can walk away anytime

When two agents have different split percentages with their brokerages, their final earnings must be calculated separately before comparing.

• Calculate each side's brokerage share first
• Apply each agent's individual split percentage
• Subtract to find the difference between amounts

Memory trick: Two agents, two splits, compare at the end

A long-term lease of land only, where the tenant typically constructs improvements at their own expense, with ownership of the land remaining with the landlord.

• Often 50-99 year terms
• Tenant owns improvements during lease term
• At lease end, improvements typically revert to landowner

Memory trick: Ground lease: build big on borrowed dirt.

Inducing homeowners to sell by suggesting protected-class individuals moving into the area will harm property values.

• Illegal under Fair Housing Act
• Also called 'panic peddling'
• Preys on racial/ethnic fears to generate listings

Memory trick: Blockbusting 'busts' the block by scaring owners into selling

A form of ownership where a corporation holds title to the building, and residents own shares of stock entitling them to a proprietary lease for their unit.

• Corporation holds title; owners hold stock, not real property title directly
• Proprietary lease grants right to occupy a specific unit
• Differs from condos, where each owner holds fee simple title to their unit

Memory trick: Co-op = Corporation owns it; you just hold stock and a lease.

CLTV measures the total of all loans secured by a property as a percentage of the property's value, used to determine how much additional financing is allowed.

• CLTV = total loans ÷ property value
• Subtract existing loans from maximum allowed total to find room for new financing
• Lenders cap CLTV to limit risk on secondary financing

Memory trick: Combine all loans, then compare to the value cap

An insurance policy protecting a property buyer against financial loss from title defects that existed before the policy's effective date.

• Paid as a one-time premium at closing
• Remains in force as long as owner or heirs hold interest
• Distinct from lender's policy, which only protects the loan balance

Memory trick: Owner's policy = 'my shield forever'; Lender's policy = 'shield till loan's over.'

Real estate commissions often pass through two levels of splitting: between brokerages, then between broker and agent.

• Always calculate total commission first
• Apply brokerage split before agent split
• Keep track of which percentage applies to which base

Memory trick: Split the pie twice before anyone eats

A reasonable accommodation is a change in rules, policies, practices, or services that allows a person with a disability equal opportunity to use and enjoy housing, such as waiving a no-pets policy for an assistance animal.

• Distinct from reasonable modification, which involves physical structural changes
• Assistance/service animals are not considered 'pets' under fair housing law
• Landlords must grant accommodation requests unless they impose undue financial or administrative burden

Memory trick: Accommodation changes the rule; modification changes the room.

An agent given limited authority to perform a single, specific act or transaction for the principal.

• Most listing agents are special agents
• Authority is narrow and transaction-specific
• Contrast with general and universal agents

Memory trick: Special = Single deal

A special agency where the agent has an actual financial or ownership interest in the subject property, making the agency irrevocable by the principal alone.

• Cannot be terminated by principal's unilateral act
• Survives the principal's death
• Rare in typical real estate brokerage relationships

Memory trick: Coupled = agent's own money is tied in

An executed contract is one where all parties have fully performed their obligations; an executory contract still has obligations remaining to be performed.

• A signed purchase agreement before closing is executory
• After closing and full performance, it becomes executed
• Executed/executory describes performance status, not validity

Memory trick: Executed = everything's done; executory = still owing.

In the sales comparison approach, adjustments are made to the sales prices of comparable properties to account for differences between them and the subject property. The goal is to make the comparables 'look' like the subject property.

• Adjustments are always made to the comparable property's price.
• If the comparable is superior to the subject in a feature, subtract the value of that feature from the comparable's price.
• If the comparable is inferior to the subject in a feature, add the value of that feature to the comparable's price.

Memory trick: Comparable's flaws add, its strengths subtract, to match the subject's tract.

Net Operating Income (NOI) is a key metric in real estate valuation, representing a property's annual income after deducting all operating expenses, but before accounting for debt service (mortgage payments) and income taxes.

• Formula: NOI = Effective Gross Income (EGI) - Operating Expenses.
• EGI = Potential Gross Income (PGI) - Vacancy and Collection Losses.
• Does not include capital expenditures, debt service, or income taxes.

Memory trick: PGI, then vacancy's gone, EGI remains, then expenses are drawn, and NOI shines on.

The principle of regression states that a higher-valued property will tend to decrease in value if it is located among properties of lesser value. The inferior properties 'pull down' the value of the superior property.

• Often seen as the 'mansion in a modest neighborhood' effect.
• One of the social forces influencing real estate value.
• The opposite principle is progression.

Memory trick: Superior house among the lesser, its value regresses, less impressive.

The Principle of Contribution states that the value of any component of a property is determined by how much it adds to the property's overall value, regardless of its actual cost. An improvement's cost does not always equal its contribution to value.

• Value added by an improvement is not necessarily equal to its cost.
• Appraisers analyze if an improvement provides a return in value equal to or greater than its cost.
• Helps determine if an improvement is economically justified.

Memory trick: Cost of the part, for whole it imparts, its value's measured by what it starts.

External obsolescence (also called economic obsolescence) is a form of depreciation in the cost approach that reflects a loss in value due to factors outside the property's boundaries, over which the property owner has no control. It is generally considered incurable.

• Caused by neighborhood decline, increased traffic, environmental hazards, changes in zoning, or proximity to undesirable land uses.
• Always incurable from the property owner's perspective.
• Affects the overall market desirability and value of the property.

Memory trick: Physical, functional, external: each loss in value, a different journal.

In a Comparative Market Analysis (CMA), adjustments are made to comparable properties' sales prices to account for differences between the comparables and the subject property. The goal is to estimate the subject property's value.

• Adjustments are always made to the comparable property, never the subject.
• If the comparable is superior to the subject, its price is adjusted DOWN.
• If the comparable is inferior to the subject, its price is adjusted UP.

Memory trick: Comparable's shortcomings lift its value to match the subject's worth.

An appraisal method used for income-producing properties, which estimates the present value of future income generated by the property. It converts net operating income into a value estimate.

• Formula: Value = Net Operating Income (NOI) / Capitalization Rate (Cap Rate).
• NOI is gross income minus operating expenses (before debt service and taxes).
• Cap Rate is the rate of return an investor expects to receive on their investment.

Memory trick: NOI over Cap Rate, gives property's worth, a financial forecast.

The extraction (or abstraction) method is a technique used within the sales comparison approach to value vacant land when direct comparable land sales are unavailable. It involves analyzing sales of improved properties, estimating and deducting the depreciated value of the improvements, to 'extract' the residual value attributable to the land.

• A variation of the Sales Comparison Approach.
• Starts with the sales price of an improved comparable property.
• Subtracts the depreciated value of the improvements to isolate the land's value.
• Useful when direct vacant land comparables are scarce.

Memory trick: No direct land sales? Improved comps, improvements subtract, land's value exact.

The Gross Rent Multiplier (GRM) is a quick calculation used in real estate to estimate the value of income-producing residential properties. It is the ratio of the property's sales price to its gross annual rental income.

• Formula: GRM = Sales Price / Gross Annual Rent.
• A higher GRM generally suggests a higher price relative to the gross income.
• Does not account for operating expenses, vacancies, or other factors affecting net income.

Memory trick: GRM's high, price is steep, for every dollar, more you leap.