Real Estate Salesperson Licensing Exam Real Estate Practice, Brokerage Operations, and Math Flashcards

24 sample cards from the Real Estate Practice, Brokerage Operations, and Math deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is loan-to-value ratio (LTV), and the LTV on a $240,000 loan for a property appraised/sold at $300,000?

   LTV = loan amount / value (lesser of price or appraised value). $240,000 / $300,000 = 80% LTV.

2. What are discount points, how much does one point cost, and how much do 2 points cost on a $200,000 loan?

   One point = 1% of the loan amount, paid to lower the interest rate. 2 points x 1% x $200,000 = $4,000.

3. What is the formula for capitalization rate, and the cap rate if a property with $40,000 NOI is valued at $500,000?

   Cap rate = NOI / value. $40,000 / $500,000 = 8%. (Rearranged: Value = NOI / cap rate.)

4. How are property tax and similar prorations between buyer and seller generally calculated at closing?

   Determine the per-day (or per-month) cost, then charge each party for the portion of the period they owned/used the property. The party who owes for time they didn't pay is debited; the other is credited.

5. In proration, what is the difference between a 360-day (banker's/statutory) year and a 365-day (actual) year?

   A 360-day year uses 12 months of 30 days each for simpler math; a 365-day year uses the actual number of days. The exam will specify which to use; results differ slightly.

6. Annual property taxes are $3,650 (use a 365-day year). The seller owns the property through the day of closing, which is day 90 of the year. What is the seller's share?

   Daily tax = $3,650 / 365 = $10/day. Seller's share = 90 days x $10 = $900.

7. What is a transfer tax (documentary stamp tax), and how is it typically calculated?

   A tax on the conveyance of real property, charged as a rate per increment of the sale price (e.g., $0.50 or $1.00 per $500 of price). Example at $1/$500 on $200,000 = $400.

8. At closing, a debit and a credit—define each and give one example for the buyer.

   A debit is a charge (money owed/paid by a party); a credit is money received or applied for a party. For the buyer, the purchase price is a debit, while the earnest money deposit and new loan amount are credits.

9. What is the appraisal formula tying together value, income, and rate (IRV)?

   Income = Rate x Value. Rearranged: Value = Income / Rate, and Rate = Income / Value. (Income capitalization approach.)

10. How do you calculate Net Operating Income (NOI) for the income approach?

    NOI = Effective Gross Income (potential rent minus vacancy/collection loss, plus other income) minus Operating Expenses. NOTE: debt service (mortgage payments) is NOT an operating expense and is excluded from NOI.

11. What is an assessed value and how is it used with a tax rate (mill rate) to compute property tax?

    Assessed value is the value assigned by the tax assessor (often a percentage of market value). Tax = assessed value x tax rate. With mills: 1 mill = $0.001, so tax = assessed value x mills / 1000.

12. A property has an assessed value of $200,000 and a tax rate of 25 mills. What is the annual tax?

    25 mills = $0.025 per dollar (25/1000). Tax = $200,000 x 0.025 = $5,000.

13. In investment analysis, what is cash-on-cash return and how is it calculated?

    Cash-on-cash return = annual pre-tax cash flow / total cash invested (down payment plus costs). It measures the return on the actual cash put into the deal, accounting for financing/leverage.

14. What is the difference between gross rent multiplier (GRM) and gross income multiplier (GIM), and how is GRM used?

    GRM = price / monthly gross rent (residential, rent only). GIM = price / annual gross income (commercial, all income). Estimated value = GRM x monthly rent (or GIM x annual income).

15. What is leverage in real estate investment, and what makes it positive vs. negative?

    Leverage is using borrowed money to increase potential return on invested cash. Positive leverage: the property's return exceeds the cost of borrowing (amplifies gains). Negative leverage: borrowing cost exceeds the return (amplifies losses).

16. What is depreciation (cost recovery) for federal income tax on investment real estate, and what is NOT depreciable?

    Depreciation is an annual deduction recovering the cost of income-producing improvements over a set recovery period (residential 27.5 yrs, commercial 39 yrs straight-line). LAND is not depreciable, and a personal residence is not depreciable.

17. What is the Section 121 capital gains exclusion on the sale of a principal residence?

    A homeowner may exclude up to $250,000 of gain ($500,000 for married filing jointly) on the sale of a primary residence, if they owned and used it as their main home for at least 2 of the last 5 years.

18. What is a Section 1031 like-kind (tax-deferred) exchange?

    A provision allowing an investor to defer capital gains tax by exchanging one investment/business real property for another like-kind property, following strict rules (e.g., 45-day identification and 180-day completion periods). Personal residences don't qualify.

19. What is 'boot' in a 1031 exchange?

    Boot is any non-like-kind value received in the exchange (cash, debt relief, or personal property). Boot received is taxable to the extent of gain, even within an otherwise tax-deferred exchange.

20. How is the gain on the sale of investment real estate calculated, including the role of adjusted basis?

    Gain = amount realized (sale price minus selling costs) minus adjusted basis. Adjusted basis = original cost + capital improvements - accumulated depreciation. Higher depreciation taken lowers basis and increases taxable gain.

21. What is an ad valorem tax, and what does the term mean?

    Ad valorem means 'according to value.' It is a tax levied based on the assessed value of real property—i.e., the general property tax.

22. What is a special assessment in property taxation?

    A one-time or limited tax levied only on properties that benefit from a specific public improvement (e.g., new sidewalks, sewers, streetlights), charged in proportion to the benefit received, separate from the general ad valorem tax.

23. What is a tax lien's priority relative to other liens, and what can happen if property taxes go unpaid?

    Real property tax (and special assessment) liens generally have priority over ALL other liens, including mortgages. Unpaid taxes can lead to a tax sale/foreclosure; some states issue a tax certificate and allow a redemption period.

24. What is a homestead tax exemption?

    A reduction in the taxable assessed value of an owner's primary residence (and sometimes added protection from certain creditors), lowering the property tax owed for qualifying homeowners.

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Real Estate Practice, Brokerage Operations, and Math flashcards FAQ