One of the most confusing types of real estate math problem you will encounter is determining what portion of expenses the seller and buyer owes. While most of these calculations are taken care of by the settlement company, it is a good idea for any real estate agent to know how it is calculated. Most likely, you’ll probably get a question or two from your client on how the numbers were calculated.
You’ll need to know a few things in order to solve this real estate math problem:
1) Who “owns” the closing date? This can depend on local practices, although they should mention it on the real estate licensing exam.
2) Is the amount based on a per month or per year? This determines what you need to divide by (30 or 31 days for monthly, 360 or 365 days for yearly?
3) Who already paid? The seller is responsible for everything up to the day of closing and the buy is responsible for everything after closing. So if the seller already paid in advance for something, they will be owed a credit that they buyer has to pay. If the buyer is going to pay for something later, the seller would then owe the buyer a credit.
Let’s take an example of the real estate math problem:
Charles is selling his home to John. They have set the closing date for June 21. If Charles has already paid the annual real estate taxes of $2160, how much of a credit does Charles deserve? Use the 360 day method and assume the buyer owns the day of closing.
The solution to this real estate math problem is:
The 360-day method assumes each month has 30 days (30 x 12 = 360).
First, calculate the number of days the seller “owns”, which is January 1 – June 20 = 6 months + 20 days = 200 days. This means the buyer owns 160 days.
Second, calculate the per day rate of the taxes = $2160 / 360 = $6 / day.
Third, calculate how much the buyer owes the seller in taxes. Since the buyer owns 160 days, he is responsible for 160 x $6 = $960 in taxes to the seller.
Want more practice?
If you’d like more practice with prorations, download our “125 Real Estate Math Problems Solved!” Click here to get access to 125 real estate math practice problems.