Prorations are calculated by determining the daily rate of an expense and multiplying by the number of days each party is responsible. The two common methods are the 365-day method (actual days) and the 360-day method (banker's year). For taxes paid in arrears, the seller credits the buyer for unpaid taxes. For taxes paid in advance, the buyer credits the seller for the prepaid period after closing.
Annual property taxes of $3,650 are paid in arrears. Closing is March 15 (seller owns the day). Daily rate = $3,650 / 365 = $10/day. Seller owes for January 1 through March 15 = 74 days. Seller credits buyer 74 x $10 = $740 at closing.
Always identify three things first: the annual amount, whether paid in arrears or advance, and who owns the day of closing. For arrears, the seller credits the buyer; for advance payments, the buyer credits the seller. Practice these calculations before exam day.
Related Terms
Related Concepts
Converting a percentage to a decimal involves dividing the percentage value by 100.
IRV stands for Income, Rate, and Value. It represents the relationship between Net Operating Income (I), Capitalization Rate (R), and Property Value (V).
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
The gross rent multiplier (GRM) is a quick method for estimating the value of income-producing property by multiplying the property's gross rent by a factor derived from comparable sales. GRM = Sale Price / Gross Rent.
The capitalization rate (cap rate) is the ratio of a property's net operating income to its sale price, expressed as a percentage. It is used to estimate value and compare profitability of investment properties. Cap Rate = NOI / Value.
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