Chapter 4
Your Prelicensing Education
In This Chapter
• A summary of prelicensing requirements
• An overview of the real estate principles course
• An introduction to property rights and the ways to hold title
• A look at the differences between condos and co-ops
• A survey of deeds used to transfer property
If you’re reading this chapter, you have made the decision to become a real estate agent. Congratulations! You are about to enter an exciting and abundant profession. In all states and provinces, licensing is required to become a real estate agent. You have two steps in front of you to achieve your goal. One is to satisfy the prelicensing educational requirements. The second step is to take and pass the licensing exam.
This chapter covers step one, satisfying your state’s prelicensing educational requirements for real estate agent licensing. Each state’s requirements differ. A few states have no educational requirements. Most states require an average of 60 hours of education, while California and Quebec, Canada, tip the scales at 135 hours and 240 hours, respectively. Requirements should be obtained from the Real Estate Commission in the state where you want to practice.
FYI!
The following states and Canadian provinces require 90 hours or more of courses before you may take the agent exam:
Arizona, California, Delaware, Idaho, Kentucky, Louisiana, Nevada, Ohio, Utah, West Virginia, Alberta, and Quebec. Some of these hours can be filled within a year or two after licensing.
The Terminology
FYI!
Appraisal is covered separately by a certification procedure, and is beyond the scope of this chapter. The entry-level certification is “residential appraiser,” while the advanced designation, “general appraiser,” requires additional education and experience. California has four levels of appraiser certification.
Here’s how the real estate profession works. There are two categories of agents. The entry category is a salesperson. Some states refer to this entry licensing as broker associate, agent, or sales associate. The advanced category is the broker. Broker licensing is conferred on the agent after experience and additional education levels are met.
In this book I refer to each licensed real estate professional as an agent unless he has become licensed as a broker, at which time he is referred to as a broker. Part 6 of this book, which focuses on becoming a Top Dog, addresses advanced licensing and the examination of brokers. This chapter deals with licensing of agents only.
Requirement Exceptions
In most states licensed lawyers or graduates of law schools are exempt from some, but often not all, course requirements. For others, an exemption may apply if you took the required courses at a recognized college or university and achieved a passing grade. Most states also accord reciprocity to licensees of other states, requiring that only their state’s portion of the exam be taken.
Some states also provide exemptions from broker experience requirements, allowing qualified candidates to bypass the agent exam and go directly to the broker’s exam, if you have …
• A four-year college degree or a higher level of education.
• A certain amount of recent experience as a real estate professional in certain job categories not requiring licensing.
Cave!
Not all states and provinces have education or experience exemptions. Be sure to check on your particular state’s requirements.
If you are exempt from the agent exam, then you may read the last section of this book on becoming a Top Dog, which discusses the broker exam and its prelicensing requirements.
Prelicensing Course Procedures
The vast majority of states and Canadian provinces require license applicants to take prelicensing educational courses accredited by their state licensing agency before they qualify to sit for the exam. In other states, applicants can take these educational courses within a specified time after being licensed. Still other states require prelicensing courses to be completed before taking the exam as well as postlicensing courses targeted for one to two years after being licensed. There are significant differences between states. These additional courses are over and above annual continuing education courses that are required in all states to keep your license current.
FYI!
The following is a partial list of supplemental courses offered in California where other courses must be completed in addition to a course on real estate principles. If your state has supplemental course requirements, it is good to know which real estate career you intend to pursue so you can gear your courses toward that field.
• Real Estate Appraisal
• Property Management
• Real Estate Finance
• Real Estate Economics
• Legal Aspects of Real Estate
• Business Law
• Escrows
• Mortgage Loan Brokering and Lending
• Computer Applications in Real Estate
Prelicensing courses and the state exams cover the general real estate principles described later in this chapter as well as state-specific courses covering the laws specific to your state. Some states have additional course requirements. In those states, licensees often are given the option of selecting courses from a course list.
Determine Your State’s Requirements
The best way to determine your state’s licensing requirements is to search the Internet for “(name of your state) real estate commission.” This search should bring you to the agency that regulates the licensing of real estate professionals. Mark the site as a favorite on your web browser so you can easily return to it.
Take note of the following requirements and exemptions:
• License requirements, such as age, citizenship, and other factual information
• Prelicensing course requirements
• Postlicensing course requirements
• Course requirement exemptions
• Agent licensing exemptions
With this information you will know what courses you need to take, how many hours these courses involve, whether you can skip the agent exam and just take the broker exam, and whether there are courses you will have to take after licensing to complete the process.
Prelicensing Courses
Companies providing prelicensing instruction have programs tailored to meet state prelicensing course requirements. Some states allow all course work to be done online or in correspondence courses. Some states require all or some classroom study. To find these companies, do another Internet search for “(name of your state) real estate prelicensing courses” or look in the Yellow Pages under Real Estate Schools. Some large real estate firms also offer prelicensing programs to qualify you for the exam and prepare you to take the licensing exam.
FYI!
You want to locate a company that provides the training that suits you best. If online methods suit you and comply with your state’s requirements, find an online company. If you feel you do better with human interaction for your instruction or if your state requires it, find a company that fits these requirements. These companies are set up to conform with your state’s requirements. The vast majority of prelicensing instructors offer state-specific courses.
When you search for course instruction, make sure that the company you sign up with also has courses that prepare you for the real estate exam itself. You may wonder why you need an examination preparation course after you’ve just completed all these real estate courses. In Chapter 5, you will understand why. There is an art to taking the real estate exam, and there are courses to make you a master at the exam-taking process.
Timing and Surviving
On average, it takes about three months from the time you enroll in the prelicensing courses to take your licensing exam. The average time for students to complete the prelicensing courses is six to eight weeks. You then receive your certificate of completion, apply for the exam, and take the exam, all of which takes four to five weeks. In other words, three months may elapse from the day you enroll in your prelicensing courses to the day you sit down and actually take your state exam.
It’s a good idea to take your coursework and the exam while you’re still employed elsewhere. Start saving money on the side. Build up approximately six months of seed money so that you can start your new career without money concerns. Don’t forget that you will be paid on an irregular basis by commissions earned, and in the beginning you may not earn a commission for some time. It takes a good amount of wherewithal both financially and emotionally to jump-start a new real estate business. But anything worthwhile takes some good advance planning and a strong dose of persistence.
Cave!
Ideally, when you begin your practice you will want to have a nice car to tour clients in, a portable phone, a laptop computer, a PDA, and a digital camera. All of these cost money. Make sure you are financially set to acquire this equipment and live your life comfortably for about half a year before you start your new career.
Start telling everyone you know of your intentions to enter the real estate business and load up your database with names and contact information so you will have prospects to contact when you start your real estate business. Don’t leave your employment until you have a good stash of cash and have passed the examination.
Real Estate Principles
The remainder of this chapter touches on the general real estate principles that are covered in your prelicensing courses and on your licensing exam. Of course, these principles do not include state-specific laws. For each course description, there is an average percentage of how much of the licensing exam you can expect each subject to cover.
Nature of Real Property and Ownership
The nature of real estate property and ownership should make up about 20 percent of the total exam.
Types of Real Property Rights
Real estate rights exist in many forms. The visible, or apparent, rights are the land and its improvements. Other rights also include the air, water, mineral and oil, and gas rights. There are also real property and personal property rights. Real property interests also come in varying types of estates, including fee simple (absolute and indefinite), life estates (measured by a lifespan), and leasehold estates (leases).
def·i·ni·tion
Real property is the land, its rights, and anything attached to it. The improvements (home, barn, or anything built on the property) are considered real property. Real property is transferred by deed.
Personal property is anything on the land that is not affixed and is moveable. For instance, furniture and farm equipment are personal property since they are not permanently affixed to the land. Personal property is transferred by bill of sale, not deed.
Fee simple is the most complete ownership one can have in a property. It establishes ownership of a property without limitation by time or any other factor. Most people own property in fee simple.
Here is an example of how property rights and ownership work: if I buy your property, you will most likely transfer fee simple title to me. With that title, I also receive the right to the air above the property, the resources below it (oil, for example), and the improvements on the property.
Holding Title
Title may be held by one or more persons and various different recognized entities. Methods of holding title, each of which have legal and tax significance, differ between the states. In some states, individuals can hold title in joint tenancy, meaning that the survivor of the owners becomes the sole owner without the necessity of probate. In other states, married couples desiring this type of survivorship hold title as tenants by the entirety. Community property states, representing a minority of states, permit holding title as community property. Your prelicensing course will instruct you on the ways for holding title in your state.
FYI!
If you live in an area where views are important, your neighbors may claim they have the right to a view over your property. They don’t. Generally, you have the right to use the air above your property (the view) however you choose.
def·i·ni·tion
Joint tenancy is a way co-owners hold title in nearly all states if they want a surviving co-owner to receive the deceased co-owner’s interest without probate. The co-owners do not have to be married.
Survivorship. The co-owner automatically receives full title without the need for probate when a co-owner dies.
Tenants by the entirety is the way a husband and wife hold title in 27 states if they want the surviving spouse to receive the deceased spouse’s interest without probate. It is similar to joint tenancy used in other states.
Community property is a way of holding title without survivorship by married persons in states that have community property laws.
Community property with right of survivorship is a way of holding title by married persons in some states that have community property laws which allow the surviving spouse to receive a deceased spouse’s interest without probate.
Tenants in common is a way for co-owners to own property together without survivorship rights. Their interests pass to their heirs, not to one another, when they die.
California and a few other community property states now permit married persons to hold title as community property with right of survivorship, a combination of joint tenancy and community property and similar to tenancy by the entirety. Tenants in common is usually the way co-owners hold title if they are not married. Each state’s real estate laws provide detailed information on holding title.
FYI!
Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. Tenancy by the entirety states are Alaska, Arkansas, Delaware, District of Columbia, Florida, Hawaii, Indiana, Kentucky, Maryland, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Vermont, Virginia, Washington, West Virginia, and Wyoming.
Here is an example of how holding title works: if a married couple (Papa Bear and Mama Bear, for example) wants to hold title so the survivor receives the property without probate, they will hold title as “Papa Bear and Mama Bear, husband and wife, as tenants by the entirety.”
If this married couple lives in a community property state they would hold title as “Papa Bear and Mama Bear, husband and wife, as community property with rights of survivorship.”
If Papa Bear and Mama Bear are not married but want the survivor to have full title, title would be held as “Papa Bear and Mama Bear, as joint tenants.”
If Papa Bear and Mama Bear do not want the survivor to receive title but instead want their heirs to inherit it, title would be held as “Papa Bear and Mama Bear, as tenants in common.”
Common Interest Developments
Common interest developments consist of condominiums and cooperatives. In condominium ownership each unit has its own deed and is separately taxed and mortgaged. Governing functions are most often carried out by an elected association which assesses association dues to the condominium owners. Documents called conditions, covenants, and restrictions (CC&Rs) define what owners can and cannot do with their properties. Cooperatives are different since owners do not go on title, instead receiving shares in the cooperative and a lease of a unit.
def·i·ni·tion
Condominiums are properties developed for concurrent ownership where each owner has a separate interest in a unit combined with an undivided interest in the common areas of the property.
Cooperatives are ownership of property by a corporation in which each resident owns a percentage share of the corporation, but does not hold title to the property.
Covenants, conditions, and restrictions, often referred to as CC&Rs, are rules that govern how a property looks and is used. These limitations are most commonly recorded on title on properties in a subdivision by the developer of the property. They are common with condominiums and multi-use properties, but may also pertain to single-family homes.
Here is an example of how common interest development works: if I purchase an interest in a condominium, my name goes on the title and the legal description to the property shows exclusive occupancy of my particular unit and a nonexclusive right to use the common area of the property as a whole. For a cooperative, I would receive shares in the corporation and the lease of a unit, but my name would not go on the title.
Property Restrictions
Property restrictions include factors that restrict the use or ownership of a property. Easements and CC&Rs restrict the full and free use of property while judgments, liens, and mortgages affect the equity of the property. All of these restrictions are recorded on the title to the property.
Here is an example of how property restrictions work: an example of an easement is a right my property gives to a neighbor to run drainage pipes across my property at a certain location. In that location, I cannot build in a way that interferes with the easement right. There is an easement recorded on my property in favor of my neighbor.
In addition, CC&Rs recorded on my property may require that I must obtain the consent of the design review committee if I want to add onto my outdoor patio.
def·i·ni·tion
Easements are rights to use the property of another person for a specific purpose. Easements are recorded on the title on both the property enjoying the right and on the property burdened by the right.
Equity is the difference between the value of the property and the loans against it.
An example of a lien is when my lender records a lien (a deed of trust or mortgage depending on the state) on my property in the amount of $200,000 since they loaned me this amount. When I sell the property, this amount must be paid off. Another example is a money judgment someone obtains against me and ends up as a lien against my property.
Governmental Limitations
The use of properties is subject to governmental restrictions in the form of zoning ordinances (regulation of the building of structures and use of the property for certain purposes) and building codes (standards of building and permit regulations). A process called eminent domain allows a governmental body to condemn a property for public use and pay the owner just compensation.
def·i·ni·tion
Eminent domain is the governmental right to take private property for necessary public use as long as it fairly compensates the owner. The process by which this occurs is called condemnation.
Here is an example of governmental limitations and how they affect property rights: my property is in an R-1 zone, which allows one, single-family home per one acre. (R stands for residential and 1 represents how many homes are permitted.) If the government decides it needs my property for the public good to extend the freeway, it exercises its eminent domain powers and must compensate me for the value of my property.
Land Description
The ways of legally describing a property consist of government survey systems (grids), metes and bounds, and subdivision lot and block numbers.
def•i•ni•tion
Metes and bounds is a method of identifying a parcel by reference to its boundaries and its shape.
Here is an example of a land description: a metes and bounds description begins with a point of beginning and uses the four quadrants of the compass by use of degrees and feet, in other words, “beginning at the intersection of Main and Minor Streets thence along the south side of Little Street for 150 feet, thence south 45 degrees east … (360 degrees covered) … to the point of beginning.”
Valuation of Property
The valuation of property section of the exam makes up about 15 percent of the total exam length. The following sections discuss the various aspects of property valuation.
Appraisal
Appraisal is the process of creating an opinion about value by the use of accepted practices. It takes comparable recent sales, size, amenities, and condition of the property, depreciation, and several other accounting principles into consideration, depending on the type of property and the type of appraisal.
All lenders require an appraisal of a property to justify the real property loans they make. If I want to know the value of my property, the best method is to obtain an appraisal.
def•i•ni•tion
Depreciation is the allocation of the cost of an improvement over its life according to a set formula in the form of a tax deduction.
Taxes and Assessments
Income tax advantages relating to principal residences, vacation homes, and investment property are covered. The principal residence owner enjoys deductions for payment of loan interest and property taxes and exemptions from gain on sale. The investment property renders depreciation and other investment deductions and the ability to sell through a tax-free exchange.
The deductions an owner can take depend on whether the property is her principal residence, a vacation home, or investment property.
def•i•ni•tion
Tax-free exchanges, also known as 1031 exchanges, allow taxes on profits to be deferred for real estate owners selling investment, rental, business, or vacation real estate and investing in other real estate.
Financing of Real Estate
Financing real estate accounts for about 20 percent of the exam. The following sections discuss the aspects of financing you can expect on the exam.
Types of Loans
There are many types of loans, including VA, FHA, and conventional loans. For example, if I am a veteran or qualify for an FHA-insured loan, I may be able to obtain a more favorable loan through these branches of the government. This is more of a memorization exercise than anything else.
Mortgages and Foreclosures
Nearly all properties are purchased with a loan that takes the form of a mortgage or deed of trust recorded on the title. These loans allow the lender to foreclose in the event of default. Lender requirements are discussed as well as consequences of default.
For example, if I buy a property worth $300,000 and the loan is for $250,000, the lender will record its security interest on the title as a deed of trust or mortgage, depending on the state the property is in, and will foreclose on that interest if I default on the loan.
def•i•ni•tion
VA is the acronym for Veterans Administration. FHA stands for Federal Housing Administration. FHA loans allow qualified borrowers to obtain loans with as little as a 3 percent down payment.
To foreclose on a property means to liquidate the property for payment of a debt secured by it.
To default is to not meet a legal obligation.
Transfer of Ownership
Transfer of ownership accounts for about 15 percent of the exam.
Deeds
Types of deeds are warranty deeds, grant deeds, and quitclaim deeds. The type of deed used confers the type of guarantee given when a property is transferred. The wording of the deed is important to make the deed a valid contract. The process of recording deeds as well as the concept of adverse possession as a means to acquire title to a property are important to understand.
Here is an example of a deed: if I sign a quitclaim deed, I make no title warranty to you. If I sign a warranty or grant deed, I do make title warranties to you. To claim your property by adverse possession, I file an action in the court system to quiet title (obtain title) to your property.
def•i•ni•tion
A warranty deed guarantees that the title is free and clear. A grant deed has fewer guarantees than a warranty deed. A quitclaim has no guarantees.
Recording is the act of entering deeds and other similar documents affecting title to a property in the public record.
Adverse possession is the acquisition of property through prolonged and unauthorized use of someone else’s property.
Closing Procedures
The acts of approving of clear title through a title report, ensuring a clear title through the purchase of title insurance, and completing the act of transferring title by recording the deed all serve to finalize the transfer of a property. Settlement statements allocate the amounts each party is charged for transferring title and itemizing its expenditures.
def•i•ni•tion
Clear title is ownership of property subject only to the claims described in a title report. A title report is the report issued by a title company or closing attorney reporting the condition of the title to a property as disclosed by a search of the public record.
Title insurance is a policy guaranteeing that the title is clear and the property is legally owned by the seller. Basic coverage does not involve a site inspection by the title company whereas extended coverage may. A site inspection allows the title insurance to provide coverage for more conditions.
A settlement statement is a detailed accounting of buyer and seller debits and credits in the transaction.
The title report tells you whether there are easements, CC&Rs, or other restrictions affecting the property you intend to acquire. Title insurance ensures that you have clear title. Recordation of the deed in the public record makes the transaction part of the public record. The settlement statement describes how much you pay at closing for interest, insurance, purchase price, loan charges, agent commission, taxes, escrow fees, and so on.
Real Estate Brokerage
Real estate brokerage accounts for about 30 percent of the exam. The following sections describe the aspects of real estate brokerage.
Agency
Agency relationships describe the obligations between the agents in the transaction and the buyers and sellers. For example, if I represent you as your agent in a transaction, I have an agency relationship with you. I become your legal agent, and you become my principal.
There are many agency relationships, including seller’s agent, buyer’s agent, and dual agent.
Listings
A listing is the employment contract between a broker and a seller. These contracts provide for commission amount, term of the listing, agent’s duties, and a description of the type of listing. Most listings are exclusive right to sell listings.
Here is an example of a listing agreement: when my client lists her property for sale with me, my exclusive right to sell listing agreement states that the listing is for four months, the listing price is $250,000, and the total commission to be paid is 6 percent of the sale price.
def•i•ni•tion
A real estate agency relationship is one where your client, or the principal, is represented by you, the agent, to act on their behalf. There are many legal obligations that arise because of this relationship.
A dual agent represents both a buyer and seller in a transaction.
A listing is a contract between the agent’s broker and the owner that gives the broker the right to sell or lease the property.
An exclusive right to sell is a type of listing agreement between an owner and an agent’s broker that pays the broker a commission even if the property is sold by someone else during the listing term.
Sales Contracts and Options
Purchase agreements include all the terms by which a buyer will buy and a seller will sell. It provides for the price, closing date, contingencies, and remedies on default. Option agreements are distinguished, as they establish a right to buy at a later time.
For example, the offer I make on a property becomes a purchase agreement after it is accepted by the seller. It regulates the entire transaction.
An example of an option agreement is if you agree to sell me your property in two years for a specified amount, I have an option agreement with you.
Federal Laws
def•i•ni•tion
Option agreements give you the right to buy a property at a later specified time and price.
You must be aware of fair housing laws relating to discrimination and disabilities, regulations that make loan procedures more understandable to consumers, and federally regulated environmental risks. Environmental issues include radon, asbestos, lead-based paint, and underground storage tanks.
In the practice of real estate, you need to be aware of protected rights afforded by discrimination and disability laws. These laws require specific steps to be taken by agents when dealing with certain classes of consumers. Fair housing laws must be memorized so you may be aware of when a particular law comes into play.
Consumer protection laws regulate the way loans are introduced to the public. These laws require finance charges and annual percentage rates to be expressed in simple, understandable ways. As agents, we must be aware of the requirements of these laws.
The government, too, protects buyers with respect to an ever-increasing list of environmental conditions. Sellers are required to disclose information relating to these conditions. As agents for buyers and sellers, we must be aware of the laws relating to environmental conditions and continually monitor this ever-changing body of law. For example, in the last many years, natural hazards such as earthquake propensity, the presence of mold, and the presence of lead-based paint have been added to the list of environmental conditions. The list seems to get longer with each passing year.
Property Management
The role and duties of the property manager, landlord-tenant relationships, leasing law, and laws relating to fair practices come under the heading of property management. There is a comprehensive body of law regulating leasing practice, which should be understood to some extent by all agents, even if they do not work as property managers. This body of law also involves fair housing practices, which protect renters from prohibited landlord acts.
Course Challenges
The previous discussion represents a highly summarized but rather complete overview of the real estate principles you will study in your prelicensing courses and what you will encounter on your licensing exam. Some of these subjects you will never encounter again in all of your real estate practice while others will be involved in your day-today activities. Your exam preparation course, described in the next chapter, will cover these subjects in detail.
The Least You Need to Know
• It can take three months to study and get your license, and longer to obtain your first commission.
• Each state has specific requirements for getting licensed, and there are entry-level licenses and advanced licenses, with requirements for each level.
• The course work can be very interesting, with valuable information on property rights, ways to hold title, and differences in types of deeds.
• Property restrictions, such as easements and CC&Rs, can affect an owner’s property rights.
• The steps you take in a real estate transaction are fully detailed in the prelicensing course.
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