math proration lecture to print - wild apricot€¦ · hoa dues rent on rental ... step #2:...

10/22/2019

1

Prorations occur when a Buyer and a Seller need to split certain expenses at closing.

These costs appear on the net sheet prepared by the agent and/or the settlement sheet (either a HUD‐1 or a Closing Disclosure) prepared by the closing attorney.

Taxes

Insurance

HOA dues

Rent on rental properties

10* Questions

© 2019 ABA Enterprises, LLC |All Rights Reserved. 1

Real Estate Prorations: Part 1

What do proration problems look like?

EXAMPLE: The insurance premium was $792 for the year, has been paid in advance by the seller and the policy began on January 1. If the closing date is May 12 andthe buyer wishes to assume the policy, how will this appear on the Settlement Sheet? Use a calendar year and the day of closing will go to the seller.

10* Questions



1

2

10/22/2019

2

Calculate the cost AFTER closing date

May 12Closing Date

Calculate the cost BEFORE closing date

Jan 1 Dec 31Seller Buyer

INSURANCE BILL PAID

TAX BILLTO BE PAID

ADVANCE:

ARREARS:

10* Questions



Advance Vs Arrears

Premium covers the ENTIRE YEAR

Debit Buyer, Credit Seller

Debit Seller, Credit Buyer

ADVANCE: Debit Buyer, Credit Seller: DB, CS ARREARS: Debit Seller, Credit Buyer: DS, CBALWAYS CALCULATE THE DEBIT SIDE!

Tax bill covers the ENTIRE YEAR

IF PAID IN ADVANCE: Debit Buyer, Credit Seller

ADVANCE means the seller paid for the expense BEFORE the closing date.

*Solve for how much the Buyer needs to pay

Since the buyer will assume the policy, the seller needs to collect the buyer’s share at closing.

Calculate the cost for time AFTER the closing date; Usually applies to property insurance.

IF PAID IN ARREARS: Debit Seller, Credit Buyer

ARREARS means the bill will arrive AFTER the closing date.*Solve for how much the Seller needs to pay

Since the seller won’t be around to pay their share of the bill when it arrives later in the year, the buyer needs to collect it at closing.

Calculate the cost for time BEFORE the closing date; Usually concerns property tax payments.

10* Questions



Who to debit? Who to credit?

3

4

10/22/2019

3

Steps to follow!

1. Determine which side to debit and to credit. ADVANCE: Debit Buyer, Credit Seller, DB, CS ARREARS: Debit Seller, Credit Buyer, DS, CB

2. Verify which method to use: Banker’s Year (360) or Calendar Year (365) methodIf the question doesn’t state it, use the banker’s year method (360).

3. Calculate the daily rate

4. Note who “gets” the day of closing & COUNT the number of days to be paidThe person that “gets” the day of closing is PAYING for the day of closing.

5. Calculate as needed

10* Questions



This will always be the same!

Calendar Year/365‐Method: The year consists of 365 days using the actual number of calendar days per month.

Banker’s Year/360‐Method: The year consists of 360 days with 30 days per month. Each month will have 30 days REGARDLESS of how many days it has on a calendar!

10* Questions



Calendar Year Vs Banker’s Year

If the question does not state which method to use, use the banker’s year method/360‐day method.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

31 28 31 30 31 30 31 31 30 31 30 31 365

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

30 30 30 30 30 30 30 30 30 30 30 30 360

5

6

10/22/2019

4

Use the “knuckle trick” if you can’t remember how many days are in each month.

Months on the TOP of the knuckles have 31 days.

Months in the BOTTOMon the knuckles have 30 (28) days.

10* Questions



How may days are in each month?

Mar31 May

31July31

Aug31

Jan31 Oct

31

Dec31

Feb28

Apr30 Jun

30 Sept30

Nov30

Calculate the cost AFTER closing date

May 12Closing Date

Calculate the cost BEFORE closing date


INSURANCE BILL PAID

TAX BILLTO BE PAID

ADVANCE:

ARREARS:

10* Questions



Advance Vs Arrears

Premium covers the ENTIRE YEAR



ADVANCE: Debit Buyer, Credit Seller: DB, CS ARREARS: Debit Seller, Credit Buyer: DS, CBALWAYS CALCULATE THE DEBIT SIDE!

Tax bill covers the ENTIRE YEAR

7

8

10/22/2019

5

10* Questions



Do I count the day of closing or not? ARREARS

Jan 1 May 12Seller Buyer

MAY

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 29

29 30 31

12

“PAID IN ARREARS” means the bill will be paid AFTER the closing date by the buyer. Thus, calculate the cost for time BEFORE the closing date.

If the question says that the day of closing “goes to the seller,” INCLUDE the closing day in the count of days.

If the question says that the day of closing “goes to the buyer,” DO NOT INCLUDE the closing day in the count of days.

Dec 31

“Closing day goes to the seller”:Count from Jan 1 until May 12

“Closing day goes to the buyer”: Count from Jan 1 until May 11

JAN FEB MAR APR

JUN JUL AUG SEP OCT NOV DEC

10* Questions



Do I count the day of closing or not? ADVANCE


MAY

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 29

29 30 31

12

“PAID IN ADVANCE” means the bill was paid BEFORE the closing date by the seller. Thus, calculate the cost for time AFTER the closing date;

If the question says that the day of closing “goes to the buyer,” INCLUDE the closing day in the count of days.

If the question says that the day of closing “goes to the seller,” DO NOT INCLUDE the closing day in the count of days.

Dec 31

“Closing day goes to the seller”:Count from May 13 until the end of the year

“Closing day goes to the buyer”:Count from May 12 until the end of the year

9

10

10/22/2019

6

The question will state whether the day of closing belongs to the seller or the buyer. The person that “gets” the day of closing, PAYS FOR THE DAY OF CLOSING.

IF PAID IN ADVANCE: Debit Buyer, Credit Seller

ADVANCE means the bill was paid BEFORE closing by the seller.

Thus, calculate the cost for time AFTER the closing date;

If the question says that the day of closing “goes to the seller,” DO NOT INCLUDE the closing day in the count of days.

If the question says that the day of closing “goes to the buyer,” INCLUDE the closing day in the count of days.

IF PAID IN ARREARS: Debit Seller, Credit Buyer

ARREARS means the bill will arrive AFTER closing and will be paid by the buyer.

Thus, calculate the cost for time BEFORE the closing date;

If the question says that the day of closing “goes to the seller,” INCLUDE the closing day in the count of days.

If the question says that the day of closing “goes to the buyer,” DO NOT INCLUDE the closing day in the count of days.

10* Questions



Who gets the day of closing?

QUESTION: Property taxes are $876 per year and run from January 1 until the end of the year. If property taxes are paid in arrears and the closing date is May 12, how will this appear on the Settlement Sheet? Use a calendar year and the day of closing will go to the seller.

Step #1: Determine who gets a DEBIT and who gets a CREDIT:

10* Questions



ARREARS: Calendar Year/365‐Method

ARREARS: Day of Closing to SELLER

11

12

10/22/2019

7

Most ad valorem taxes (property taxes) are paid in ARREARS, meaning at the end of the year after the year has passed.


May 12Closing Date $

DEBIT SIDE CREDIT SIDE

10* Questions



ARREARS: Property Tax Proration

TAX BILLTO BE PAID

ARREARS:




Step #1: Determine who gets a DEBIT and who gets a CREDIT: DS, CB

Step #2: Calculate daily rate: $876 ÷ 365 = $2.40 per day

Step #3: Count the total number of days the seller must pay for:

Jan Feb Mar Apr May Total

31 28 31 30 ? ?

10* Questions



ARREARS: Calendar Year/365‐MethodARREARS: Day of Closing to SELLER

13

14

10/22/2019

8

10* Questions



QUESTION: “the closing date is May 12” and “the day of closing will go to the seller.”



Jan Feb Mar Apr MAY

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 29

29 30 31

12 12 days in May






Step #4: Multiply total number of days by daily rate: 132 x $2.40 = $316.80


31 28 31 30 12 132

10* Questions




ANSWER: $316.80 DS, CB


15

16

10/22/2019

9

QUESTION: Property taxes are $900 per year and run from January 1 until the end of the year. Assuming the property taxes are paid in arrears and the closing date is May 12, how will this appear on the Settlement Sheet? Use a banker’s year and the day of closing will go to the seller.

Step #1: Determine who gets a DEBITand who gets a CREDIT.


May 12Closing Date

10* Questions



ARREARS: Banker’s Year/360‐Method

Debit Seller, Credit Buyer!

TAX BILLTO BE PAID





10* Questions



ARREARS: Banker’s Year/360‐MethodARREARS: Day of Closing to SELLER


30 30 30 30 ? ?

Step #3: Count the total number of days the seller must pay for.

17

18

10/22/2019

10

10* Questions



EXAMPLE: “the closing date is May 12” and “the day of closing will go to the seller.”



Jan Feb Mar Apr MAY

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 29

29 30

12 12 days in May






4 months (Jan, Feb, Mar & Apr) x 30 days = 120 days; 120 days + 12 days in May = 132 days

Step #4: Multiply the total number of days by the daily rate: 132 days x $2.50 = $330

10* Questions




ANSWER: $330 DS, CB



30 30 30 30 12 132

19

20

10/22/2019

11

QUESTION: Property taxes are $949 per year and run from January 1 until the end of the year. If property taxes are paid in arrears and the closing date is May 12, how will this appear on the Settlement Sheet? Use a calendar year and the day of closing will go to the buyer.



Step #3: Count the total number of days the seller will pay for:


31 28 31 30 ? ?

10* Questions



ARREARS: Calendar Year/365‐MethodARREARS: Day of Closing to BUYER

10* Questions



EXAMPLE: “the closing date is May 12” and “the day of closing will go to the buyer.”



Jan Feb Mar Apr MAY

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 29

29 30 31

12 11 days in May

May 11

ARREARS: Day of Closing to BUYER

21

22

10/22/2019

12

QUESTION: Property taxes are $949 per year and run from January 1 until the end of the year. If property taxes are paid in arrears and the closing date is May 12, how will this appear on the Settlement Sheet? Use a calendar year and the day of closing will go to the buyer.




Step #4: Multiply total number of days by daily rate: 131 x $2.60 = $340.60


31 28 31 30 11 131

10* Questions






QUESTION: Property taxes are $900 per year and run from January 1 until the end of the year. Assuming the property taxes are paid in arrears and the closing date is May 12, how will this appear on the Settlement Sheet? Use a banker’s year and the day of closing will go to the buyer.



Step #3: Count the total number of days the seller must pay for.

10* Questions



ARREARS: Banker’s Year/360‐MethodARREARS: Day of Closing to BUYER

23

24

10/22/2019

13

10* Questions



EXAMPLE: “the closing date is May 12” and “the day of closing will go to the buyer.”



Jan Feb Mar Apr MAY

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 29

29 30

12 11 days in May

May 11


QUESTION: Property taxes are $900 per year and run from January 1 until the end of the year. Assuming the property taxes are paid in arrears and the closing date is May 12, how will this appear on the Settlement Sheet? Use a banker’s year and the day of closing will go to the buyer.



Step #3: Count the total number of days the seller will pay for:

Step #4: Multiply the total number of days by the daily rate:131 days x $2.50 = $327.50

10* Questions







30 30 30 30 11 131

25

26

10/22/2019

14

Step #1: Decide who to DEBIT and who to CREDIT:

QUESTION: The insurance premium was $803 for the year, has been paid in advance by the seller and the policy begins January 1. If the closing date is May 12 and the buyer wishes to assume the policy, how will this appear on the Settlement Sheet? Use a calendar year and the day of closing will go to the seller.

10* Questions



ADVANCE: Calendar Year/365 MethodADVANCE: Day of Closing to SELLER

PREMIUM COVERS THE ENTIRE YEAR.

Insurance premiums are paid in ADVANCE.

In the real world, most buyer secure their own insurance, but we still need to know how to do this.


May 12Closing Date

INSURANCE BILL PAID

$

10* Questions



ADVANCE: Insurance Premiums

ADVANCE:


ADVANCE: Day of Closing to SELLER

27

28

10/22/2019

15



Step #3: Count the total number of days:

May Jun Jul Aug Sep Oct Nov Dec Total

? 30 31 31 30 31 30 31 ?


10* Questions




DB, CS

10* Questions



QUESTION: “the closing date is May 12” and “the day of closing will go to the seller.” So, the buyer is paying from May 13 until May 31 in the month of May.

ADVANCE: Calendar Year/365 Method


Jun Jul Aug Sep Oct Nov DecMAY

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 29

29 30 31

12

19 DAYS!COUNT the days!

Do not subtract!

COUNT from May 13 to May 31

Seller is paying for this side

May 13Buyer is paying for this side


29

30

10/22/2019

16

Step #1: Decide who to DEBIT and who to CREDIT: DB, CS





19 30 31 31 30 31 30 31 233

ANSWER: $512.60 DB, CS


10* Questions




QUESTION: The insurance premium was $792 for the year, has been paid in advance by the seller and the policy began on January 1. If the closing date is May 12 and the buyer wishes to assume the policy, how will this appear on the Settlement Sheet? Use a banker’s year and the day of closing will go to the seller.


Jan 1 Dec 30Seller BuyerMay 12

Closing Date

INSURANCE BILL PAID

10* Questions



ADVANCE: Banker’s Year/360‐Method

Debit Buyer, Credit Seller!


31

32

10/22/2019

17

QUESTION: The insurance premium was $792 for the year, has been paid in advance by the seller and the policy began on January 1. If the closing date is May 12 and the buyer wishes to assume the policy, how will this appear on the Settlement Sheet? Use a banker’s year and the day of closing will go to the seller.


Step #2: Calculate the daily rate: $792 ÷ 360 = $2.20 per day

Step #3: Count the total number of days the buyer must pay for.

10* Questions



ADVANCE: Banker’s Year/360‐MethodADVANCE: Day of Closing to SELLER

10* Questions



QUESTION: “the closing date is May 12” and “the day of closing will go to the seller.” So, the buyer is paying from May 13 until May 30 in the month of May.

REMEMBER! Since we are using the banker’s year method, there sill only be 30 days in May.

ADVANCE: Banker’s Year/360 Method



1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 29

29 30

12


Do not subtract!


Seller is paying for this side



33

34

10/22/2019

18

QUESTION: The insurance premium was $792 for the year, has been paid in advanceby the seller and the policy began on January 1. If the closing date is May 12 and the buyer wishes to assume the policy, how will this appear on the Settlement Sheet? Use a banker’s year and the day of closing will go to the seller.





10* Questions



ADVANCE: Banker’s Year/360‐MethodADVANCE: Day of Closing to SELLER



18 30 30 30 30 30 30 30 228





? 30 31 31 30 31 30 31 ?

QUESTION: The insurance premium was $803 for the year, has been paid in advance by the seller and the policy begins January 1. If the closing date is May 12 and the buyer wishes to assume the policy, how will this appear on the Settlement Sheet? Use a calendar year and the day of closing will go to the buyer.

10* Questions



ADVANCE: Calendar Year/365 MethodADVANCE: Day of Closing to BUYER

35

36

10/22/2019

19

10* Questions



QUESTION: “the closing date is May 12” and “the day of closing will go to the buyer.” So, the buyer is paying from May 12 until May 31 in the month of May.

ADVANCE: Calendar Year/365 Method

Jan 1 Seller Buyer


1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 29

29 30 31

12


Do not subtract!



ADVANCE: Day of Closing to BUYER






20 30 31 31 30 31 30 31 234


QUESTION: The insurance premium was $803 for the year, has been paid in advance by the seller and the policy begins January 1. If the closing date is May 12 and the buyer wishes to assume the policy, how will this appear on the Settlement Sheet? Use a calendar year and the day of closing will go to the buyer.

10* Questions



ADVANCE: Calendar Year/365 MethodADVANCE: Day of Closing to BUYER

37

38

10/22/2019

20

QUESTION: The insurance premium was $792 for the year, has been paid in advanceby the seller and the policy began on January 1. If the closing date is May 12 and the buyer wishes to assume the policy, how will this appear on the Settlement Sheet? Use a banker’s year and the day of closing will go to the buyer.



Step #3: Count the total number of days the buyer will pay for.

10* Questions




Debit Buyer, Credit Seller!


10* Questions



QUESTION: “the closing date is May 12” and “the day of closing will go to the buyer.” So, the buyer is paying from May 12 until May 30 in the month of May.

REMEMBER! Since we are using the banker’s year method, there sill only be 30 days in May.

ADVANCE: Banker’s Year/360 Method

Jan 1 Seller Buyer


1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 29

29 30

12


Do not subtract!


Buyer is paying for this sideMay 12


39

40

10/22/2019

21


QUESTION: The insurance premium was $792 for the year, has been paid in advance by the seller and the policy began on January 1. If the closing date is May 12 and the buyer wishes to assume the policy, how will this appear on the Settlement Sheet? Use a banker’s year and the day of closing will go to the buyer.





10* Questions






19 30 30 30 30 30 30 30 229

41

math proration lecture to print - wild apricot€¦ · hoa dues rent on rental ... step #2:...

Documents