Simple Interest Example: 6,000 is loaned for one 30-day month and the total

Real Estate Math - Prorations Flashcards

Simple Interest Example:$6,000 is loaned for one 30-day month and the total

amount of principal and interest due at the end of that month is $6,017.5, what is the annual rate of

interest?Answer: $17.50 (Interest); $6,000 (Principal); ???

(Rate);12 (Time in months) so:$17.50 (Interest) = $6,000

(Principal) x (Rate / 12). Therefore:($17.50 / $6,000) x 12 =

3.5% Standard Year365 or 366 days per year Simple InterestInterest = Rate x Principal x TimeThis formula considers interest to be generated only on the principal invested.Transfer / Conveyance Tax Example:Purchase price is $450,000, State documentary transfer fee is $.55 for each $500 or fraction thereof. Property was purchased with $400,000 cash and an assumption of the $50,000 seller's mortgage. Assumptions are exempt from the transfer fee in this example. What is the documentary

transfer fee?Answer: $400,000 / $500 = 800800 x $.55

=$440 Compound interestThis formula considers interest to be generated when accumulated interest is reinvested to generate interest earnings from previous interest earnings.InterestInterest is the "rent" paid to possess, use, and enjoy someone else's money. The yearly rent for each dollar we

use (borrow) is called the interest rate.Example: If $.08 is

paid each year for each dollar, the interest rate is 8% per year.Transfer Tax / Conveyance Tax / Revenue Stamps State taxes on the transfer of real estate imposed on (1) the total amount of the transfer price (less the amount of a loan or liens the buyer assumes responsibly for payment of), or (2) the amount of either assumed mortgages or newly created mortgages.Interest problems generally involve 4 simple concepts:1. Interest Rate, or Rate for short2. Principal (the amount of money borrowed)3. Time (number of years or fraction of years the principalis borrowed4. Interest Due and Owing (Which will be called Interest) Commission and Commission SplitsCommission - A percentage of the sales price. Commission

is split between broker and salesperson.Example: Sales

price is $800,000 with broker receiving 5% commission.Salesperson receives 40% of broker's commission. What is the salespersons commission?$800,000 x .05 = $40,000 (broker's commission)$40,000 x .04 = $16,000 (salesperson's commission)

Ordinary interestInterest calculated by the 30/360 day count convention.Statutory or Bankers Year360 days per year; 12 months of 30 days per month ProrationsThe adjustment of expenses that have either been paid or are in arrears in proportion to actual time of ownership as of the closing or other agreed-upon date. Prorations are generally calculated according to a statutory year.Commission example when sales price is unknown 6% commission split 50-50 between brokers; salesperson for broker A gets 40% of broker A's commission.Salesperson's commission was $6,000. What was the sales price?$6,000 = 40% of 50% of 6% of sales price, so;(.4 x .5 x .06) x sales price= .012 x sales price (i.e., 1.2% of sales price)Therefore, dividing each side of the

equation by .012 we get $500,000 = sales price: $6,000 /

.012 = $500,000

Proration Example:Purchase price on a condo is $200,000 and had been

rented by the buyer for $1,500 per month. Escrow closed on September 16th. How much should the sales price be adjusted at close if the day of closing belongs to the

buyer?Answer: Rent is usually collected in advance on the

first day of the month unless otherwise stated. Seller received $1,500 on September 1st. Statutory calendar say September has 30 days. Buyer has the 16th so buyer and seller each have 15 days of the month. Seller should credit buyer with $750.

Other interest examples can be found on: Page 1621 of the Kindle book.

Proration computations; 5 steps1. Determine which, if any, expenses are to be prorated.2.Determine to whom the expenses should be creditedor debited.3. Determine how many days the expenses are tobe prorated.4. Calculate the per day proration amount.5.Multiply the number of days by the per day prorationamount.Amortization tableSee, pg 1604 on Kindle review book