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Supplemental Materials |
| Prorations - Area and Cube Math - Commissions
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PRORATIONS:
Prorations is the dividing of proportionate shares of costs of a continuing nature between buyer and seller based on the length of time that each owned the property.
Items usually prorated include:
a. Insurance (Paid in Advance)
b. Taxes (Paid in Arrears)
c. Interest (Paid in Arrears)
d. Rents (Paid in Advance)
Prorations will be credited to the party who has paid or must pay
for the cost:
a. Seller's share of the property taxes will be credited to the Buyer
since the Buyer MUST pay the preceding year's taxes at the end of the year.
b. Buyer's share of insurance credited to seller since the seller has
paid for the premium at the beginning of the policy year.
PRORATION EXAMPLE: Insurance, 30/360
In the Example above, the Seller bought hazard insurance on the property Dec. 15, XXXX.
There will be a credit back to the seller for the unused portion. There COULD be a charge
to the Buyer if the Buyer elects to purchase the seller's insurance policy. We will use
the CPA's calendar year of 30/360/(30 days to a month, 360 days to a year. We will reduce
the price to a MONTHLY figure then a DAILY figure. Always carry 3 decimal places.
Subtraction Method, The Formula for subtracting
dates is as follows:
Take the expiration date and write is down starting with the largest BLOCK of time which
is the YEAR, followed by the next largest BLOCK which is the MONTH
then followed by the DAY. It will look like this;
| Year | Month | Day | |
Expiration Date |
1998 1998 |
12 10 |
14 15 |
You can now subtract the dates starting with the numbers on the
right as you normally would do. You will notice that you will have to BORROW
a number because we cannot end up with a negative number.
NOTE, WE WILL BE BORROWING AN ENTIRE MONTH (30 DAYS) TO ADD TO THE NUMBER 14. (You
would do the same for the month if needed.) Therefore instead of subtracting 15 from 14,
we will be taking 15 from 44.
If the Insurance was $1213.78 per year.
Monthly = $1213.78 ÷ 12 = $101.148. Then 1 X $101.148 = $101.148
Daily = $101.148 ÷ 30 = $3.371.
| Year | Month | Day | |
|
1998 (After Borrowing) -1998 |
11 -10 1 |
44 -15 29 |
Monthly--1 X $101.148 = $101.148
Daily----29 X $3.371 = $97.759
Add 101.148 + 97.759 = 198.907 then roundup, $198.91.
TOTAL of unused portion of insurance is $198.91.
Then we would multiply the monthly amount times the number of months and the daily amount times the number of days and add the two and then round up to the nearest cent.
PRORATION EXAMPLE: Taxes, 30/360
Buyer MUST pay taxes for entire year at end of Year. (In Arrears)
Seller must reimburse buyer for time they owned the property.
Charge Seller 9 months 15 days and Credit Buyer.
Taxes start on January 1 and run through December 31.
If closing happens on 10/15/XXXX, then count how many months and days has expired since
Jan 1.
In the example above, the seller has occupied the property 9 full months and 15 days.
Steps to Proration:
a. Determine annual cost by dividing total cost by number of years.
(only where expense is paid for more than one year increment)
b. Determine Monthly cost by dividing by 12.
c. Determine Daily costs by dividing by 30.
d. Determine which party is to be charged for the prorata cost. ( Sellers part vrs. Buyers
part.)
e. Count months and days, years if needed, that the seller owes.
f. Determine the monthly and daily costs for the taxes by dividing by 12 and 30
respectively, carring 3 decimal places and adding then rounding up.
g. Charge the Seller and then Credit the Buyer for the taxes on the HUD1. This action will
give the buyer the money to pay in full, the total amount of taxes due at the end of the
year.
Day of Closing Rule:
a. Seller gets day of closing. Seller's responsibility to pay costs for the day
of closing and seller gets the benefits of rents in case of income producing property.
b. Taxes - Seller is charged for all time up to and including the day of close.
c. Insurance - Buyer is charged for all time after the day of closing through the last day
of the policy period.
Interest Proration: ACT (Actual Calendar Time)
a. Calculate daily interest by multiplying the annual interest rate times the
unpaid balance or amount of new loan.
Example - $56,000.00 X 7% = $3920.00 ÷ 365 = $10.743 per day.
b. For the BUYER, count the number of days from and including the day of close to the end
of the month. (You might see this stated as from close to the first of following month. It
means the same thing.) For the SELLER, count the number of days from the first to closing,
including the day of close. For Oct 15, there is 15 days.
Example - Closing is Oct 15. There are 31 days in October, 31 minus 15 = 16 + the day of
closing = 17 days.
NOTE: For the BUYER, the day of closing is the FIRST day. If we closed on the 20th
of September, there is 11 days from the 20th to the 30th because the 20th is one(1) the
21st is two(2) and so on.
c. Multiply number of days times the daily figure and then round up to the
nearest cent. Then charge the proper party.
If the seller has an existing mortgage on the property, they will need to pay the interest portion of the payment for the month in which they are closing.
Rent Proration: ACT
a. Calculate daily rent. (monthly rent ÷ number of days in month)
b. Rents are paid in advance.
c. Charge seller for the days after closing and credit buyer. You do this because the
seller has already received the rent money from the tenant or tenants. Use the Subtraction
method if rents have been paid for months or years in advance.
Problems:
1. Seller purchased a 3 year insurance policy on September 1, 1998. Total costs was $2,700.00. Buyer will assume and pay for seller's insurance. The day of closing is November 1, 1999. Prorate the cost to Buyer.
2. Taxes are $480.00 per year. Sale closes April 15. Prorate the taxes. (charge to whom and credit to whom.)
3. Interest on a loan the buyer is assuming is 8%. On date of closing, June 10, the unpaid balance is $20,000.00. Interest is paid in arrears and is to be prorated.
Prorations - Area and Cube Math - Commissions
- Real Estate Taxes
Legal Descriptions - Table
of Measures and Equivalents
If you right click a link, you can open that link in a new window.
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