Calculating Proration

On the real estate licensing exam, you may encounter a proration question.  Prorations occur because not every expense or income can be distributed at closing.  For example, the seller may have already gotten a full month’s rent from a tenant before the closing.  Or the buyer might have to pay real estate taxes at the end of the year (when the seller is long gone).  In order to make sure all income and expenses are accounted for, closing companies will prorate various payments in order to make sure no one needs to come after the transaction to settle any expenses.

While calculating the prorated amount is not difficult, many people find it confusing to determine who gets paid.  To answer this type of real estate math problem, you will have to determine whether the seller owes the buyer money or vice versa.  Since proration problems can be confusing, we put together a cheat sheet on proration problems.

There are only 4 types of prorations – either the amount to be prorated is income or an expense, and either the seller has (or has not) paid it already.  By knowing these two pieces of information, you can determine who gets the prorated amount.  Depending on the situation, you will either determine the proration amount is for the number of days BEFORE closing or the number of days AFTER closing.  Using this cheat sheet in the beginning may help to clarify various types of proration situations you may encounter on the real estate licensing exam.  Also remember that the amount that is debit/credit to the seller is ALWAYS THE SAME as the amount that is credit/debit to the buyer.