Chapter 1 - Introduction to Real Estate and Real Property INTRODUCTION TO REAL ESTATE AND REAL PROPERTY

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1 CHAPTER 1 INTRODUCTION TO REAL ESTATE AND REAL PROPERTY THE REAL ESTATE BUSINESS There are many specialties in the Real Estate Business, among them are included: Brokerage Brokerage is the business of bringing people together in a real estate transaction. A real estate licensee acts as a point of contact between two or more people in negotiating the sale, purchase, or rental of property. Appraisal Appraisal is the process of estimating a property's market value based on established methods and the appraiser's professional judgment. Although real estate training will give brokers and managing brokers some understanding of the valuation process, most lenders require that a professional appraisal by a licensed appraiser accompany a loan package. Property management A property manager is a person or company hired to maintain and manage property on behalf of its owner. By hiring a property manager, the owner is relieved of many day-to-day management tasks, such as finding new tenants, collecting rents, altering or constructing new space for tenants, ordering repairs, and generally maintaining the property. Financing Financing is the business of providing the funds that make real estate transactions possible. Most transactions are financed by means of mortgage loans or trust deed loans secured by the property. Individuals involved in financing real estate may work in commercial banks, mortgage banking, or mortgage brokerage companies. 15

2 Subdivision and development Subdivision is the splitting of a single property into smaller parcels. Development involves the construction of improvements on the land. These improvements may be either on-site or off-site. Home Inspection Professional home inspectors conduct a thorough visual survey of a property's structure, systems, and site conditions and prepare an analytical report that is valuable to both purchasers and homeowners. Counseling Counseling involves providing clients with competent independent advice based on sound professional judgment. A real estate counselor helps clients choose among the various alternatives involved in purchasing, using, or investing in property. Education Real estate education is available to both practitioners and consumers. Colleges and universities, private schools, and trade organizations all conduct real estate courses and seminars, from the principles of a pre-licensing program to the technical aspects of tax and exchange law. Auctioning Buying or selling real estate at auction uses an open and competitive bidding process to transfer property. PROFESSIONAL ORGANIZATIONS National Association of REALTORS (NAR) is the largest real estate organization. Its Web site is www. realtor.org. The NAR sponsors various affiliated organizations that offer professional designations to brokers, managing brokers, and other professionals who complete required courses in areas of special interest. Members subscribe to a Code of Ethics and are entitled to be known as REALTORS or REALTOR- ASSOCIATES. You must be a member of NAR to use the term REALTOR. The National Association of Real Estate Brokers (NAREB), whose members are known as Realtists, also adheres to a code of ethics. The NAREB arose out of the early days of the civil rights movement as an association of racial minority real estate brokers in response to the conditions and abuses that eventually gave rise to fair housing laws. Today, the NAREB remains dedicated to equal housing opportunity. The National Association of Hispanic Real Estate Professionals (NAHREP) is the largest minority trade group in the real estate industry. Its mission is to increase the rate of sustainable Hispanic home ownership by empowering real estate professionals that serve the Hispanic community. The Asian Real Estate Association of America (AREAA) is a non-profit professional trade organization dedicated to promoting sustainable homeownership opportunities in Asian American communities. 16

3 TYPES OF REAL PROPERTY Just as there are areas of specialization within the real estate industry, there are different types of property in which to specialize. Real estate can be classified as: RESIDENTIAL - single-family or multifamily housing, in urban, suburban, or rural areas, COMMERCIAL - office space, shopping centers, stores, theaters, hotels, and parking facilities, INDUSTRIAL- warehouses, factories, land in industrial districts, and power plants, AGRICULTURAL - farms, timberland, ranches, and orchards, SPECIAL PURPOSE - churches, schools, cemeteries, and government-held lands. THE REAL ESTATE MARKET Supply and Demand The forces of supply and demand in the market determine how prices for goods and services are set. Essentially, when supply increases and demand remains stable, prices go down, when demand increases and supply remains stable, prices go up. Greater supply means producers need to attract more buyers, so they lower prices. Greater demand means producers can raise their prices because buyers compete for the product. Supply and demand in the real estate market Two characteristics of real estate govern the way the market reacts to the pressures of supply and demand: uniqueness and immobility. Uniqueness means that no matter how similar two parcels of real estate may appear, they are never exactly alike. Each occupies its own unique geographic location, and two properties are never exactly the same inside. Immobility refers to the fact that property cannot be relocated to satisfy demand where supply is low. Nor do buyers necessarily make relocation decisions based on greater housing supply in a certain locale. For these reasons, real estate markets are local markets. When supply increases and demand remains stable, prices go down. When demand increases and supply remains stable, prices go up. Factors Affecting Supply Labor force and construction costs A shortage of skilled labor or building materials or an increase in the cost of materials can decrease the amount of new construction. Government Controls Local governments also can influence supply. Land-use controls, building codes, and zoning ordinances help shape the character of a community and control the use of land. 17

4 Governmental Financial Policies The government's monetary policy can have a substantial impact on the real estate market. The Federal Reserve Board establishes a discount rate of interest for the money it lends to its member banks. These interest rates play a significant part in people's ability to buy homes. Governmental agencies, such as the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA), also have impact by insuring or guaranteeing loans. Policies on the taxation of real estate can have both significant and complex effects on the real estate market. Real estate taxation is a necessary source of revenue for local governments. Factors Affecting Demand Population Shelter is a basic human need, so the demand for housing grows with the population. Although the total population of the country continues to rise, the demand for real estate increases at a faster rate in some areas than in others. Demographics Demographics is the study and description of population. The population of a community is a major factor in determining the quantity and type of housing in that community. Family size, the ratio of adults to children, the ages of children, the number of retirees, family income, lifestyle, and the growing number of single-parent and empty nester households are all demographic factors that contribute to the amount and type of housing needed. Employment and wage levels Decisions about whether to buy or rent and how much to spend on housing are closely related to income. When job opportunities are scarce or wage levels low, demand for real estate usually drops. LAND, REAL ESTATE, AND REAL PROPERTY LAND Land is defined as: THE EARTH'S SURFACE EXTENDING DOWNWARD TO THE CENTER OF THE EARTH AND UPWARD TO INFINITY. Land includes not only the surface of the earth but also the underlying soil. Land also refers to objects that are naturally attached to the earth's surface, such as boulders and plants. Land includes the minerals and substances that lie far below the earth's surface (subsurface). It even includes the air above the earth, all the way up into space (airspace). REAL ESTATE Real estate is defined as: LAND AT, ABOVE, AND BELOW THE EARTH'S SURFACE, PLUS ALL THINGS PERMANENTLY ATTACHED TO IT. 18

5 The term real estate is similar to the term land, but it means much more. Real estate includes the natural land along with all human-made improvements. An improvement is any artificial addition to land, such as a building or a fence. The term IMPROVEMENT, as used in the real estate industry, refers to any addition to the land. Land also may be improved by streets, utilities, sewers, arid other additions that make it suitable for building. REAL PROPERTY Real property is defined as: THE INTERESTS, BENEFITS, AND RIGHTS THAT ARE INCLUDED IN THE OWNERSHIP OF LAND AND REAL ESTATE. Real property includes the surface, subsurface, airspace, any improvements, and the BUNDLE OF LEGAL RIGHTS the legal rights of ownership that attach to ownership of a parcel of real estate. Air Rights The rights to use the space above the earth may be sold or leased independently, provided the rights have not been preempted by law. Air rights can be an important part of real estate, particularly in large cities where air rights over railroads must be purchased to construct office buildings. Now that air travel is common, the courts and the U.S. Congress have put limits on air rights. With the continuing development of solar power, air rights, solar rights, and even "view" rights are being closely examined by the courts. Air and solar rights are established by laws and ordinances that very widely from state to state. OWNERSHIP OF REAL PROPERTY Traditionally, ownership of real property is described as a BUNDLE OF LEGAL RIGHTS. In other words, a purchaser of real estate actually buys the rights of ownership held by the seller. These rights include the rights of: 1. POSSESSION 2. CONTROL 3. ENJOYMENT 4. EXCLUSION 5. DISPOSITION The concept of a bundle of rights comes from old English law. In the Middle Ages, a seller transferred property by giving the purchaser a handful of earth or a bundle of bound sticks from a tree on the property, symbolizing the whole property. The purchaser, who accepted the bundle in a ceremony, became owner of the tree producing the sticks and the land to which the tree was attached. Because the rights of ownership (like the sticks) can be separated and individually transferred, the sticks became symbolic of those rights. 19

6 PERSONAL PROPERTY PERSONAL PROPERTY IS MOVABLE. Items of personal property, also referred to as chattels, include such tangibles as chairs, tables, clothing, money, bonds, and bank accounts. Manufactured Housing MANUFACTURED HOUSING, if not connected permanently to the land, is considered moveable, therefore PERSONAL PROPERTY, as far as real estate taxes are concerned. Plants Trees and crops generally fall into one of two classes. (1) Fructus Naturales - Real Estate - Trees, perennial shrubbery, and grasses that do not require annual cultivation are considered real estate. They attach to the land. (2) Fructus Industriales - Emblements or Personal Property - Annually cultivated crops such as wheat, corn, vegetables, and fruit, known as, are generally considered personal property. As long as an annual crop is growing, it will stay with the real property unless other provisions are made in the sales contract. Severance Severance is changing Real Property into Personal Property or Personal Prope rty into Real Estate. For instance a tree (real property) can be cut down and formed into boards (personal property). When the boards are used to construct a building, the boards (personal property) are converted into a building (real property). Annexation It also is possible to change personal property into real property through a process known as annexation. For example, a landowner buys cement, stones, and sand, mixes them into concrete, and constructs a sidewalk across her land. This landowner has effectively converted personal property (cement, stones, and sand) into real property (a sidewalk). Fixtures A fixture is personal property that has been so affixed to land or a building that, by law, it becomes part of the real property. Examples of fixtures are heating systems, elevator equipment in high-rise buildings, radiators, kitchen cabinets, attached bookcases, light fixtures, and plumbing fixtures. Almost any item that has been added as a permanent part of a building is considered a fixture. During the course of time, the same materials may be both real and personal property, depending on their use and location. 20

7 Legal tests of a fixture The overall test that is used in determining whether an item is a fixture or personal property is a question of intent, in most cases. 1. Method of attachment - How permanent is the method of attachment? Can the item be removed without causing damage to the surrounding property? 2. Adaptation to real estate - Is the item being used as real property or personal property? 3. Agreement between the Parties - THE MOST IMPORTANT METHOD OF DETERMINING A FIXTURE - Usually spelled out in the Sales Contract concerning what goes and what stays. Have the parties agreed in writing on whether the item is real or personal property? What does the contract say? At the time a property is listed, the seller and real estate agent should discuss which items will be included in the sale. Any item that the seller does not want included in the sale should be replaced prior to public viewing. The written sales contract between the buyer and the seller (Agreement between the Parties), should list articles which the buyer and Seller agree can be moved and articles which the Buyer and Seller agree are to remain with the property, to eliminate any doubt as to whether they are personal property or fixtures. Trade fixtures A Trade Fixture is defined as Personal Property of a business owner, that, when attached to a rented space or building, remains personal property. Some examples of trade fixtures are bowling alleys, store shelves, bars, and restaurant equipment. Some additional considerations relating to Trade Fixtures are: (1). Trade fixtures must be removed on or before the last day the property is rented. (2). The tenant is responsible for any damage caused by the removal of a trade fixture. (3). Trade fixtures that are not removed become the real property of the landlord. CHARACTERISTICS OF REAL ESTATE Economic Characteristics Scarcity We usually do not consider land a rare commodity, but only a quarter of the earth's surface is dry land; the rest is water. The total available supply of land is not limitless. While a considerable amount of land remains unused or uninhabited, the supply in a given location is generally considered to be limited. Improvements Building an improvement on one parcel of land can affect the land's value and use as well as that of neighboring tracts and whole communities. For example, constructing a new shopping center or selecting a nuclear power site or toxic waste dump can dramatically shift land values in a large area. 21

8 Permanence of investment The capital and labor used to build an improvement represent a large fixed investment. Although even a well-built structure can be razed to make way for a newer building, improvements such as drainage, electricity, water, and sewage systems often remain. The return on such investments tends to be long term and relatively stable. Location This economic characteristic, sometimes called area preference or situs, does not directly refer to a geographic location but rather to people's preferences for given areas. It is the unique quality of these preferences that results in different values for similar units. PREFERENTIAL LOCATION IS THE MOST IMPORTANT ECONOMIC CHARACTERISTIC OF LAND. Physical Characteristics Immobility The geographic location of any given parcel of land can never be changed. It is fixed or immobile. Some of the substances of land are removable and that topography may shift. Indestructibility Land also is indestructible. Because Land is indestructible, Land does not depreciate. Manmade improvements on land depreciate and can become obsolete, which may dramatically reduce the land's value. This gradual depreciation should not be confused with the knowledge that the economic desirability, therefore the value of a given location, can change. Uniqueness No two parcels of land are ever exactly the same. Although they may be very similar, all parcels differ geographically because each parcel has its own location. An individual parcel has no substitute because each is unique. The uniqueness of land also is referred to as nonhomogeneity. LAWS AFFECTING REAL ESTATE Seven Sources of Law 1. United States Constitution 2. Laws passed by Congress 3. Rules of the regulatory agencies 4. State constitutions 5. State statutes 6. Local ordinances 7. Common law The unique nature of real estate has given rise to an equally unique set of laws and rights. Even the simplest real estate transaction involves a body of complex laws. Licensees must have a clear and accurate understanding of the laws that affect real estate. 22

9 The specific areas important to the real estate practitioner include: 1. law of contracts, 2. general property law, 3. law of agency, 4. the state's real estate license law, 5. environmental laws, 6. federal, state, and local tax laws, 7. state and local land-use and zoning laws, 8. environmental regulations. ILLINOIS REAL ESTATE LAW Specific Real Estate Laws The practice of real estate in Illinois is governed by the Real Estate License Act of 2000 (the Act), as amended in 2010, and Rules established by the Illinois Department of Financial and Professional Regulation. This license law is Public Act , Chapter 225 of the Illinois Compiled Statutes, Act 454. Other laws affecting real estate in Illinois may be found throughout the Illinois compiled statutes, but many of those addressing real property are in Chapter 765, ILCS The purpose of real estate license law is to protect the public from fraud, dishonesty, and incompetence in real estate transactions. HOME OWNERSHIP Ownership Expenses and Ability to Pay Home ownership involves many expenses, including utilities (such as electricity, natural gas, and water), trash removal, sewer charges, and maintenance and repairs. Owners also must pay real estate taxes and buy private mortgage insurance, and they must repay the mortgage loan with interest This is what lenders refer to as PITI (principle, interest, taxes, and private mortgage insurance; those expenses that comprise a monthly payment. Mortgage Terms To determine whether a prospective buyer can afford a certain purchase, most lenders use automated underwriting and credit scoring. Certain costs associated with the home purchase (principal and interest payment, taxes and private mortgage insurance PITI) as well as total debt could not exceed a certain percent of monthly, pre-tax (gross) income. But today, credit scores play a key role when lending institutions decide whether to lend money. Investment Considerations 1. Purchasing a home offers several financial advantages to a buyer. 2. Possible long-term gain through appreciation 3. Increase in Equity as mortgage is paid off 23

10 Tax Benefits Tax considerations may be an important part of any decision to purchase a home Homeowners may deduct from their income: 1. some or all of the mortgage interest paid 2. real estate taxes 3. certain other expenses Capital Gains Tax Exclusion - Sale of Real Estate Tax Laws now exclude all or a large portion of gain (profit) from Capital Gains Taxes 1. $500,000 is now excluded from capital gains tax for profits on the sale of a principal residence by married taxpayers who file jointly. 2. Taxpayers who file singly are entitled to a $250,000 exclusion. 3. The exemption may be used repeatedly, as long as the homeowners have both owned and occupied the property as their residence for at least two of the past five years. IRA Use for Down Payment No Penalty First-time homebuyers may make penalty-free withdrawals from their tax-deferred individual retirement funds (IRAs) 1. for down payments on their homes. 2. withdrawals are still subject to income tax. 3. the limit on such withdrawals is $10, they must be spent entirely within 120 days on a down payment to avoid any penalty. Exchanges Real estate investors can defer taxation of capital gains by making property exchanges. Even property that has appreciated greatly since its initial purchase may be exchanged for other property. A property owner will incur tax liability on a sale only if additional capital or property is also received; the tax is deferred, not eliminated. Whenever the investor sells the property, the capital gain will be taxed. To qualify as a tax-deferred exchange, the properties involved must be of like kind as defined under Section 1031 of the Internal Revenue Code. The exchanged property must be real estate of equal value and same use. Any additional capital or personal property included in the transaction to even out the value of the exchange is called boot. The IRS requires tax on the boot to be paid at the time of the exchange by the party who receives it. The value of the boot is added to the basis of the property for which it is given. Tax-deferred exchanges are governed by strict federal requirements, and competent guidance from a tax professional is essential. Tax deductions Homeowners may deduct from their gross income any of the following: Real estate taxes (but not interest paid on overdue taxes) Mortgage interest payments on most first and second homes (the combined amount of acquisition indebtedness cannot exceed $1,000,000, and the combined amount of home equity indebtedness cannot exceed $100,000) 24

11 Certain loan origination fees in the year of purchase (rules differ for refinance and equity loans) Loan discount points in the year of purchase (whether paid by the buyer or the seller) Loan prepayment penalties NOTE Some costs are NOT allowed as Tax Deductions 1. appraisal fees, 2. notary fees, 3. preparation costs, 4. mortgage insurance premiums, 5. VA funding fees, 6. points are deductible in the year of a house purchase if certain criteria are met. 7. Points are deducted over the life of the loan for a refinance. These costs are NOT interest but are part of the cost of acquiring a home. When it is sold at a later date, these charges can be figured into the cost basis (Costs which can be added to the price of the home, which total is deducted from the selling price to determine the profit, for capital gains tax purposes.). HOMEOWNERS' INSURANCE Co-Insurance Clause Most homeowners' insurance policies contain a co-insurance clause. This provision usually requires that the owner maintain insurance equal to a specified percentage (usually 80 percent) of the replacement cost of the dwelling (not including the price of the land). An owner who has this type of policy may make a claim for the full cost of the repair or replacement of the damaged property without deduction for depreciation or annual wear and tear. Examples of Claim Calculations A homeowners' insurance policy is for 80 percent of the replacement cost of the home, or $80,000. The home is valued at $100,000, and the land is valued at $40,000. The homeowner sustains $30,000 in fire damage to the house. The homeowner can make a claim for the full cost of the repair or replacement of the damaged property without a deduction for depreciation. However, if the owner has insurance of only $70,000, the claim will be handled in one of two ways, The owner will receive either actual cash value (replacement cost of $30,000 less depreciation cost of say $3,000, or $27,000), or the claim will be prorated by dividing the percentage of replacement cost actually covered (0.70) by the policy minimum coverage requirement (0.80). So, 0.70 divided by 0.80 equals 0.875, and $30,000 multiplied by equals $26,250. Subrogation A third party, such as an insurance company, often settles any covered insurance claim. When this happens, the third party generally acquires the right to any legal damages available to the insured. This right is called subrogation. (In other words, if a house burns down due to a utility company's negligence, and the insured accepts compensation from the insurance company, then the insurance company gains the rights related to possible further payment for damages from the utility company.) 25

12 FEDERAL FLOOD INSURANCE PROGRAM The National Flood Insurance Act of 1968 was enacted by Congress to help owners of property in floodprone areas by subsidizing flood insurance and by taking land-use and land-control measures to improve future management for floodplain areas. The Army Corps of Engineers has prepared detailed maps that identify specific flood-prone areas throughout the country. To finance property with federal or federal-related mortgage loans, owners in flood-prone areas known as special flood hazard areas (SFHAs) are required to obtain flood insurance. The Federal Emergency Management Agency (FEMA) administers the flood insurance program. Homeowners' insurance policies always exclude floods, so flood coverage must always be purchased as a totally separate policy. Flood Insurance Policies are only issued by the Government. Policies are written annually and can be purchased from the National Flood Insurance Program (NFIP A government Agency), or the designated servicing companies in each state. Flood Insurance: What's Covered and What's Not FEMA defines a flood as "a general and temporary condition of partial or complete inundation of two or more acres of normally dry land or two or more properties from an overflow of inland or tidal waves, an unusual and rapid accumulation or runoff of surface waters, mudflows or mudslides on the surface of normally dry land, or the collapse of land along the shore of a body of water." The physical damage to a building or personal property directly caused by a flood is covered by flood insurance policies. Flood policies exclude coverage for losses such as swimming pools, cars, money, animals, groundcover, or underground systems. Policies are of two types: replacement cost value (RCV) or actual cost value (ACV). Deductibles and premiums vary accordingly. 26

13 CHAPTER 1 - QUESTIONS & ANSWER KEY CHAPTER 1 QUESTIONS 1. A licensed real estate professional acting as a point of contact between two or more people in negotiating the sale, rental or purchase of a property Is known as a(n): A. Sales affiliate B. Sponsoring Broker C. Property manager D. Appraiser 2. All of the following would affect demand EXCEPT: A. Population B. Demographics C. Wage levels D. Government fiscal policy 3. The two characteristics of real estate that govern the way the market reacts to supply and demand are: A. Financing and appraisal B. Mobility and conformity C. Uniqueness and immobility D. Demographics and interest rates 4. Real estate markets are best described as: A. Mobile B. Balanced C. Local D. Immune to supply and demand forces 5. Certain items on the premises that are installed by the tenant and are related to the tenant's business are called: A. Fixtures B. Emblements C. Trade fixtures D. Easements 6. Which of the following is NOT described as personal property? A. Chattels B. Trade fixtures C. Emblements D. Fixtures 27

14 CHAPTER 1 - QUESTIONS & ANSWER KEY 7. Real Estate is defined as: A. The earth's surface extending downward to the center of the earth and upward to infinity. B. Interest, rights, and benefits that are included in the ownership of Real Estate. C. Land at above and below the earth's surface plus all things permanently attached to it. D. The ownership of Real Estate. 8. According to law, a trade fixture is: A. A fixture B. An easement C. Personalty D. A license 9. Suzy is interested in a house that fits most of her needs; but is located in a busy downtown area where she is not sure she wants to live. Her concern about location is called: A. Physical deterioration B. Area preference C. Permanence of investment D. Immobility 10. An important characteristic of land is that it may be modified or improved at any given time. Depending on its type, an improvement may increase the value of real estate greatly. Which one of the following would NOT be considered to be an improvement? A. Sewers B. Crops C. Buildings D. Roads 11. The word Improvement refers to all of the following EXCEPT: A. Streets B. A sanitary sewer system C. Trade fixtures D. The foundation 12. Real property can become personal property by: A. Severance B. Purchase C. Hypothecation D. Attachment 13. The rights of ownership of real property does NOT include the right of: A. Disposition B. Exclusivity C. Control D. Compatibility 28

15 CHAPTER 1 - QUESTIONS & ANSWER KEY 14. A rancher 'owns a parcel of land on which oil was discovered. If the rancher has not previously conveyed the oil rights, who owns the oil? A. The rancher B. The tenant to whom the property has been leased C. The state government D. The federal government 15. The foremost consideration in the purchase of a home is its affordability. What is the second? A. Construction specifications B. The age of the improvements C. The location of the property D. The landscaping and exterior 16. The real costs of owning a home include certain costs or expenses that many people overlook. All of the following are such costs or expenses EXCEPT: A. The income lost on cash invested in the home B. The interest paid on borrowed capital C. Maintenance and repair expenses D. Property taxes 17. A basic homeowner's insurance policy would protect all of the following EXCEPT: A. Fire and lightening B. Earthquake and volcanic action C. Windstorm and hail D. Water damage caused by a leaking pipe 18. A longer mortgage loan term will: A. Decrease the number of loans being made B. Result in lower monthly mortgage payments C. Prevent many individuals from owning homes D. cause interest rates to increase 19. All of the following are categories of the uses of real property EXCEPT: A. residential. B. developmental. C. agricultural. D. industrial. 20. All of the following are false regarding the decrease of the supply of a commodity EXCEPT: A. prices tend to rise. B. prices tend to drop. C. demand tends to rise. D. demand tends to drop. 29

16 CHAPTER 1 - QUESTIONS & ANSWER KEY 21. When the demand of a commodity decreases: A. prices tend to rise. B. prices tend to drop. C. supply tends to rise. D. supply tends to drop. 22. The phrase "bundle of legal rights" is properly included in: A. the definition of real property. B. a legal description. C. real estate transactions. D. leases for less than one year. 23. The right to control one's property includes all of the following EXCEPT the right to: A. invite people on the property for a political fundraiser. B. exclude the utilities meter reader. C. erect "no trespassing" signs. D. enjoy pride of ownership. 24. All of the following are considered to be real property EXCEPT: A. wood-burning fireplace B. awnings C. bathtubs D. patio furniture 25. The owner of a property attached a garage door opener to her house. Several years later when she listed her property, she instructed the agent that she intended to take the garage door opener with her when she moved. Can she do this? A. Yes, the act would be known as severance, and is permissible as long as it's stipulated in the sales contract. B. Yes, the act would be known as annexation, and is permissible as long as it's stipulated in the sales contract. C. No, once the garage door opener was attached to a property the law considers it real property and it cannot be removed. D. No, because the owner should have removed the garage door opener before talking with an agent. 26. All of the following are physical characteristics of land EXCEPT: A. indestructibility. B. uniqueness. C. immobility. D. scarcity. 30

17 CHAPTER 1 - QUESTIONS & ANSWER KEY 27. Personal property includes all of the following EXCEPT: A. chattels. B. trade fixtures. C. emblements. D. fixtures. 28. Fixtures are: A. real property. B. chattels. C. removable by a tenant before the expiration of the lease. D. removable by a tenant after the expiration of the lease. 29. All of the following are economic characteristics of land EXCEPT: A. scarcity. B. permanence of investment. C. uniqueness. D. area preference. 30. The geographic location of any parcel of land can: A. be changed as some substances are removable from the land. B. never be changed. C. be changed because the topography can be changed. D. be changed only under certain legal circumstances. 31. Legally, the term improvements refers to all of the following EXCEPT: A. sidewalks. B. sewers. C. shrubbery. D. retaining wails. 32. All of the following are tests for determining a fixture EXCEPT: A. intent of the parties. B. size of the item. C. method of attachment of the item. D. adaptation of the item to the real estate. 31

18 CHAPTER 1 - QUESTIONS & ANSWER KEY 33. The owner of a house wants to fence the yard for her dog. When the fence is erected, the fencing materials are converted to real estate by: A. severance. B. annexation. C. immobility. D. indestructibility. 34. A mobile home is generally considered personal property UNLESS: A. it costs over $50,000. B. it is owner-occupied for more than six months out of each year. C. it has been permanently affixed to its foundation. D. it was transferred prior to March The official name of the law that governs real estate activities in Illinois is the: A. Banking and Real Estate Licensure Act. B. Real Estate License Act of C. Real Estate License Law of D. Illinois Compiled License Law of Most homeowner's insurance policies contain which of the following clauses? A. A property improvement clause B. A coinsurance clause C. A co-ownership clause D. A property devaluation clause 37. When preparing his or her annual income tax return, the homeowner may be able to deduct all of the following EXCEPT: A. real estate taxes. B. mortgage interest on a first home. C. mortgage interest on a second home. D. mortgage interest on a third home. 32

19 CHAPTER 1 - QUESTIONS & ANSWER KEY 38. Federal income tax regulations allow a homeowner to reduce his or her annual taxable income by amounts paid for: A. repairs and maintenance. B. hazard insurance premiums. C. real estate taxes. D. mortgage interest payment. 39. Mr. and Mrs. Horton have been living in their condominium at the shore for the past 4 years and leasing to a tenant the house that they bought 25 years ago. If they sell their house, how much of the capital gain will be taxable? A. 0 percent B. 40 percent C. 50 percent D. 100 percent 40. The value that an owner has in the property that exceeds the amount of the mortgage debt is called: A. equality. B. escrow. C. surplus. D. equity. 41. The philosophy behind an exchange is: A. Income tax should not apply as long as a real estate investment remains intact B. A personal residence qualifies for tax deferment C. Increase depreciation deductions D. Marital rights need not be released 33

20 CHAPTER 1 - QUESTIONS & ANSWER KEY Notes: 34