California Real Estate License Exam Prep: Unlocking the DRE Salesperson and Broker Exam ANSWER SHEET INSTRUCTIONS: The exam consists of multiple choice questions. Multiple choice questions are answered by selecting A, B, C, or D. You may use pen or pencil. Chapter 5: Transfer of property A B C D A B C D 1. o o o o 26. o o o o 2. o o o o 27. o o o o 3. o o o o 28. o o o o 4. o o o o 29. o o o o 5. o o o o 30. o o o o 6. o o o o 31. o o o o 7. o o o o 32. o o o o 8. o o o o 33. o o o o 9. o o o o 34. o o o o 10. o o o o 35. o o o o 11. o o o o 36. o o o o 12. o o o o 37. o o o o 13. o o o o 38. o o o o 14. o o o o 39. o o o o 15. o o o o 40. o o o o 16. o o o o 41. o o o o 17. o o o o 42. o o o o 18. o o o o 43. o o o o 19. o o o o 44. o o o o 20. o o o o 45. o o o o 21. o o o o 22. o o o o 23. o o o o 24. o o o o 25. o o o o Chapter 5: Transfer of property 83 Chapter 5: Transfer of property Key Concepts Critical real estate concepts equaling approximately 8% of the state licensing exam. • Title insurance • Special processes • Deeds • Transfer through court supervision • Escrow • Types of vesting • Tax aspects Key Terms Fundamental real estate vocabulary likely to appear on the state exam with reference to the quiz questions illustrating its application. See the Real estate glossary on page 331 for the full definitions. abstract of title (q. 17) conveyance (q. 41) severalty (q. 8) adjusted basis (q. 25) delinquent taxes (q. 20) sheriff’s sale (q. 36) ad valorum (q. 22) escrow (q. 1, 3, 4, 23) tax deduction on personal adverse possession (q. 38) impounds (q. 42) residence (q. 26) American Land Title joint tenancy (q. 10, 11) tax foreclosure sale (q. 29) Association (ALTA) (q. 16) personal property (q. 24) tenancy in common (q. 7) California Veteran (CalVet) preliminary title report title (q.13, 14) loan (q. 37) (prelim) (q. 15) transfer by contract (q. 34) chain of title (q. 39) property tax assessment (q. 21) transfer by deed (q. 30, 31, 32) cloud on title ( q. 33) probate sale (q. 35) transfer stamp (q. 28) California Land Title proration (q. 2, 6, 27) vesting (q. 9) Association (CLTA) (q. 12) recording (q. 18, 19) contingency (q. 40) recurring costs (q. 5) 84 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition Note: This section is designed to give you a broad understanding of the basic principles which relate to the subject matter of this chapter. However, it is not exhaustive. For further reading on this concept, see your Real Estate Principles and Legal Aspects licensing course materials. JUST THE FACTS Title insurance A policy of title insurance is the contract under which a title insurance company reimburses or holds harmless a person who acquires an interest in real estate against a monetary loss caused by an encumbrance on title that: • is not listed in the title insurance policy as an exception to coverage; and • the insured policy holder was unaware of when the policy was issued. Thus, title insurance insures against things that happened prior to the date of issuance and guarantees against those conditions forever. It is a one-time expense (not recurring) which is paid during escrow. The title company has no obligation under a policy to clear title of the unlisted encumbrance. Title insurance policies are issued on one of several general forms used by the entire title insurance industry in California. The policies are typically issued to: • buyers of real estate; • tenants acquiring long-term leases; and • lenders whose loans are secured by real estate. Several types of title coverage are available, including: • a California Land Title Association (CLTA) standard policy; • an American Land Title Association (ALTA) owner’s extended coverage policy. The CLTA standard policy is purchased solely by buyers, carryback sellers and private lenders. The CLTA standard policy insures against all encumbrances affecting title which can be discovered by a search of public records prior to issuance of the policy. Any encumbrance not recorded, whether or not observable by an inspection or survey, is not covered due to the CLTA policy exclusions and standard exceptions. The CLTA standard policy contains pre-printed exceptions listed in the policy as Schedule B, also called standard exceptions or regional exceptions. It is the inclusion of these pre-printed boilerplate exceptions which makes the CLTA policy a standard policy. An ALTA owner’s policy does not contain pre-printed exceptions, only the typewritten exceptions listing the encumbrances which are known to the title company and affect title to the property. The ALTA owner’s policy provides greater coverage than the CLTA policy. The title search reviews the chain of title of a property, covering all documents of record affecting title since the original patent was issued in 1870. The summary of this search is called an abstract of title. From this summary, a preliminary title report is produced, and the eventual policy will be written subject to any changes that might be made. Chapter 5: Transfer of property 85 A preliminary title report, also called a prelim, is intended to disclose the current vesting and encumbrances which may be reflected on the public record affecting a property’s title. A prelim is not a representation of the condition of title or a policy of title insurance. Unlike an abstract of title, a prelim cannot be relied on by anyone and imposes no liability on the title company. Alternatively, an abstract of title is an accurate, factual representation of title to the property being acquired, encumbered or leased collected from the public records. Thus, an abstract of title may be relied on by those who order them as an absolute representation of the condition of title. A claim, encumbrance or condition which impairs the title to real property until disproved or eliminated is known as a cloud on title. Deeds A deed is a written instrument which conveys title to real estate. Title by deed passes either: • voluntarily by agreement with the owner, as in a sale in the open market or foreclosure on a trust deed or assessment bond; or • involuntarily without agreement, such as the enforcement of a creditor’s judgment or tax lien. No matter the form of writing, the individual conveying real estate is called the grantor. The individual acquiring title is called the grantee. Fee simple ownership is presumed to pass by a grant of real estate, unless a lesser possessory interest is stated, such as an easement, life estate or leasehold interest. There are several deeds that can be used to transfer an interest in real estate. The types of deeds most commonly used to convey a real estate interest are: • grant deeds; and • quitclaim deeds. To pass a fee simple interest in real estate, only the word “grant” needs to be used in the conveyance. No other precise words of conveyance are necessary in a deed to convey a fee simple ownership, such as between a seller to buyer, or parent to child. The covenants, sometimes called warranties, implied in a grant deed include: • the interest conveyed in the real estate has not been previously conveyed to another, except as disclosed in the grant deed; and • the real estate has not been further encumbered by the grantor, except as disclosed in the grant deed. A quitclaim deed conveys only the grantor’s interest in a property, if any exists. Thus, to convey real estate with covenants relating to the interest conveyed, a grant deed is used. To simply convey any interest in real estate without an assurance the individual holds that interest conveyed, a quitclaim deed is used. Quitclaim deeds are most commonly used in the event of divorces and inheritances. To be valid, a deed needs to: • be in writing; • identify the grantor and the grantee; 86 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition • contain a granting clause stating the grantor’s intention to convey; • adequately describe the real estate involved; • be signed by the grantor; and • be delivered to and accepted by the grantee. The signing of a deed by the grantor naming another person as the grantee is not enough to divest the owner of their title to the real estate. Delivery of the signed deed is required to transfer ownership. Delivery refers to two separate acts: • the grantor’s present intent to convey title, not just the act of physically handing the deed to the grantee; and • the grantee’s acceptance of the grant deed as an immediately effective conveyance. A deed does not need to be recorded to convey real estate. A deed that is delivered conveys an interest in real estate even when the deed is incapable of being recorded. Recording is the process of placing a document on file with a designated public official known as the County Recorder. All documents filed with the County Recorder put the general public of that county on notice of the contents of the document.