Practice of Real Estate and Disclosures

Trust funds, the rules that end careers

Trust funds are money or anything of value a broker receives on behalf of someone else in a transaction requiring a licence. A deposit cheque, rent collected for an owner, an advance fee, all of it. The defining characteristic is that none of it is the broker's money, at any point, for any length of time.

A salesperson never holds trust funds in their own name. Funds received by a salesperson come under the broker's control immediately, and the salesperson delivers them to the broker, who then either places them in the trust account, delivers them to the principal, or handles them exactly as the buyer's written instruction directs. That third option matters more than candidates expect, because a buyer may instruct that a deposit cheque be held uncashed until acceptance, and following that written instruction is lawful.

The deposit deadline

By the end of the next business day following receipt. Business days, not calendar days, so a Friday receipt is due Monday. Candidates guess twenty-four hours because it sounds stricter, and it is the wrong answer.

Where funds may go

A trust account at a California bank, into the hands of the principal, or into a neutral escrow depository. Those are the three destinations, and any fourth answer on a multiple-choice question is wrong.

The $200 allowance

A broker may keep up to two hundred dollars of their own money in the trust account solely to cover bank service charges. This is the only recognised exception to the rule against mixing funds, which is why 'nothing at all, under any circumstances' is a tempting but incorrect answer.

Two layers of records

A control record capturing every receipt and disbursement across the account, plus a separate beneficiary record for each transaction or client. Both are reconciled at least monthly, and the reconciliation is retained. A single ledger cannot show whose money is whose, so it does not satisfy the requirement.

Who may sign

The broker, a licensee the broker has authorised in writing, or an unlicensed employee covered by a fidelity bond at least equal to the maximum trust funds accessible. The bond requirement for unlicensed signatories is a favourite exam detail.

Interest-bearing accounts

Permitted at the request of the principal, with the interest belonging to the principal. A broker may never take the interest on client money.

Fair housing, federal floor and California ceiling

Two layers operate at once. The federal Fair Housing Act sets the floor, protecting race, colour, religion, national origin, sex, familial status and disability. California adds a substantially longer list on top, and questions in this topic very often turn on a class California protects that federal law does not.

The California additions include sexual orientation, gender identity and gender expression, marital status, ancestry, source of income, genetic information, citizenship, primary language, immigration status, military or veteran status, and age. Source of income is the one worth memorising by name, because it covers a housing subsidy such as a Section 8 voucher, and refusing to accept vouchers is unlawful in California while it is not a federal violation.

The three named practices are steering, blockbusting and redlining, and the fastest way to tell them apart is to ask who is being manipulated. Steering directs a buyer. Blockbusting frightens a seller. Redlining is a lender or insurer refusing on the basis of geography.

Advertising counts on its own

A statement of preference in an advertisement violates the Act whether or not anyone was ever actually refused. 'No children' is a familial status violation the moment it is published.

Accurate is not the same as lawful

Describing a neighbourhood's ethnic composition truthfully is still steering. The correct response to a question about whether an area suits a particular kind of family is to decline to characterise it and point the buyer to census data, school reports and crime statistics they can read themselves.

Modification versus accommodation

A modification is a physical change to the premises, such as a grab rail or a ramp, and the tenant normally pays for it. An accommodation is a change to a rule, policy or service, such as waiving a no-pets policy for an assistance animal, and the landlord bears that cost. Confusing the two is the single most common error in this topic.

The implicit bias requirement

From January 1, 2024, the Real Estate Practice course must include implicit bias and fair housing components, and the fair housing component must include interactive participatory role play as both consumer and real estate professional. That requirement is why fair housing weight in the material has risen.

The disclosure regime: TDS, NHD, and everything under them

California requires more of a residential seller than almost any other state, and the two central forms are the Transfer Disclosure Statement and the Natural Hazard Disclosure Statement. Learn what each covers, who fills in which part, and what happens when delivery is late, and most of this topic resolves.

The TDS applies to residential property of one to four units. It has three parts: the seller's own disclosure of condition, the listing agent's visual inspection, and a separate visual inspection by any cooperating agent who obtains the offer. Each agent signs their own section. The duty is a reasonably competent and diligent visual inspection of the reasonably accessible areas, which is a lower standard than a professional home inspection and cannot be delegated to one.

The delivery of the TDS in a covered transaction cannot be waived, and any purported waiver is void as against public policy. An as-is clause does not remove it either, because as-is means the seller will not repair, not that the seller need not disclose. If the buyer receives the TDS after signing the contract, they may terminate in writing within three days for personal delivery, or five days for delivery by mail. That three-versus-five distinction is tested constantly.

TDS exemptions

Transfers by foreclosure, by a fiduciary administering a decedent's estate, between spouses incident to a dissolution, and several others. Note carefully that an exemption removes the form, not the underlying common-law duty to disclose known material facts.

The six NHD zones

Special flood hazard area, area of potential flooding from dam failure, very high fire hazard severity zone, state fire responsibility area, Alquist-Priolo earthquake fault zone, and seismic hazard zone. Learn them as a set of six.

Third-party NHD reliance

A seller or agent who reasonably relies on a third-party expert's report is not liable for an error in it. That statutory shield is exactly why third-party NHD reports are universal in California practice. Reliance must be reasonable, so an agent who knows the report is wrong cannot hide behind it.

Death on the property

Three-year affirmative disclosure window. After three years there is no duty to volunteer it, but a direct question must still be answered honestly, and a death that is itself evidence of a physical defect is disclosable as a defect regardless of the window.

The AIDS provision

The statute expressly bars any cause of action for failing to disclose that an occupant was afflicted with or died from AIDS. This is one of the rare places where the law forbids a disclosure rather than requiring one, and applying the three-year rule here produces the wrong answer.

Other disclosures you may meet

Mello-Roos special tax notice, lead-based paint for pre-1978 housing, a smoke detector and water heater bracing statement, the Megan's Law database notice, and a supplemental property tax notice. Each attaches to a different trigger.

Advertising, teams, and the licence identification rule

First point of contact material must carry the licensee's name, their DRE licence identification number, and the responsible broker's identity, which may be shown by the broker's licensed name. The purpose is that a consumer can verify who they are dealing with before any relationship forms. The rule applies to the channel, not to the medium, so a text message soliciting listings is advertising exactly as a postcard is.

Team names carry their own rules. A team name must include the surname of at least one licensee member, must not imply the team is an independent brokerage, and the responsible broker's identity must appear at least as prominently as the team name. Words such as realty, brokerage or company are prohibited in a team name for that reason. No separate licence is issued to a team.

Do-not-call obligations

The Telephone Consumer Protection Act reaches text messages as well as calls, and both the federal and state registries must be scrubbed. There is no small-volume exemption.

Blind advertising

An advertisement that does not disclose the licensee's status or the broker's identity is blind advertising and is prohibited. This includes a classified listing that gives only a phone number.

Electronic records are fine

Electronic storage satisfies the three-year retention duty provided the records are legibly reproducible and available for inspection. What is not fine is storing confidential client information in an account other people can reach.

Supervision, unlicensed assistants, and the permitted-activities line

Supervision is the responsible broker's non-delegable duty. It requires written policies, rules and procedures reasonably designed to secure compliance with the Real Estate Law, covering the handling of trust funds, advertising, agency relationships, and the review of transaction documents. Independent contractor status for tax purposes does not reduce the duty in any way, and that is the trap in most supervision questions.

A broker may delegate supervisory authority over a branch, but the delegate must hold a broker licence, and the responsible broker retains ultimate responsibility. Delegation shares the work, never the liability.

The line for unlicensed assistants runs between ministerial and substantive work. Placing a sign, ordering a preliminary report, arranging appointments, preparing marketing material for the licensee's review, and handing out prepared literature at an open house are all permitted. Explaining a contract term, quoting the price, negotiating terms, discussing property condition substantively, or independently showing property are not.

DRE jurisdiction, discipline, and the Recovery Fund

Discipline is administrative, not criminal, and follows due process under the Administrative Procedure Act. The Commissioner files an accusation, the licensee may request a hearing before an administrative law judge, and a decision follows. A criminal conviction is not a precondition, because the two systems run separately.

The sanctions worth knowing are suspension for up to one year, revocation, a restricted licence, a public reproval, and a citation with a fine. Candidates confuse the one-year suspension cap with the three-year bar the Commissioner may impose on an examination candidate who cheats. Those are different sanctions under different statutes.

The Real Estate Recovery Fund pays consumers who hold an uncollectable judgment against a licensee for fraud, misrepresentation, deceit or conversion of trust funds. It is a payer of last resort: the claimant must first obtain a final civil judgment or a criminal restitution order and show that reasonable collection efforts failed. When the Fund pays, the licensee's licence is automatically suspended until the Fund is reimbursed in full with interest, and that suspension is automatic rather than discretionary.

Property management and income property

Leasing, renting, collecting rent or negotiating a lease for another for compensation is licensed activity. The most important exemption is the resident manager who lives on site at the property they manage. Unit count does not determine whether a licence is needed, which is a common wrong answer.

Several figures in this topic changed recently and older study material still carries the old ones. From July 1, 2024, the residential security deposit cap is one month's rent whether the unit is furnished or unfurnished, with a narrow exception allowing up to two months for a natural person who owns no more than two residential properties totalling no more than four units. The old two-month and three-month figures are out of date.

The deposit must be returned, or an itemised statement delivered, within twenty-one calendar days of the tenant vacating, with receipts for work over the statutory threshold or a good-faith estimate where the work is not yet done. Missing the deadline can expose the landlord to statutory damages of up to twice the deposit on top of the deposit itself.

Tenant Protection Act rent cap

Five percent plus the regional change in the cost of living, with a hard ceiling of ten percent in any twelve-month period, whichever is lower. Just cause is required to terminate after twelve months of occupancy. Substantial exemptions exist, including most separately-sold single-family homes where proper notice is given, and housing built within the last fifteen years on a rolling basis.

Lease structures

A gross lease puts taxes, insurance and maintenance on the landlord. A triple net lease shifts all three to the tenant on top of base rent. A percentage lease adds a share of gross sales above a breakpoint, which is the retail standard. A ground lease covers land with the tenant building on it.

Specialty areas, technology and serving diverse populations

A DRE licence authorises mortgage loan brokerage activity, but the federal SAFE Act layers a further requirement on top for residential mortgage loan origination: a mortgage loan originator endorsement obtained through the NMLS, carrying a unique identifier that appears on loan documents. Candidates frequently treat the two as alternatives when they operate together.

Where a negotiation is conducted primarily in Spanish, Chinese, Tagalog, Vietnamese or Korean, the party must be given an unexecuted translation of the contract in that language before signing. The English version generally remains the operative contract, so the translation is delivered alongside it rather than instead of it, and failure to provide it can allow the other party to rescind.

On technology, electronic signatures have the same legal effect as handwritten ones under the Uniform Electronic Transactions Act where the parties agreed to transact electronically, and real property purchase agreements are within its scope. Documents to be recorded follow separate notarisation rules, which is the distinction most technology questions are actually testing.