Proration
Definition
Proration is the process of dividing expenses or income between the buyer and seller at the closing of a real estate transaction. This ensures each party pays or receives only their fair share based on the period of ownership.
Example
Imagine a property sold on June 30th, and annual property taxes are $2,400. The seller owned the property for half the year (January 1st to June 30th). Proration would calculate the seller's share as $1,200, which they would pay to the buyer at closing to cover the taxes for the first half of the year.
Exam Tip
Remember that proration always involves dividing costs or income proportionally based on time. Identify the date the property changes hands (closing date) and calculate the number of days each party is responsible for.
Related Math Terms
Capitalization Rate (Cap Rate)
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
Property Value (based on Cap Rate)
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
Percentage to Decimal Conversion
Converting a percentage to a decimal involves dividing the percentage value by 100.
Monthly Interest Calculation
Monthly interest is the portion of the total annual interest that is paid or accrued each month.
Annual Interest Calculation
Annual interest is the total amount of interest charged on a loan or investment over a year.
Calculating Daily Rate
Daily rate calculation involves determining the cost or income per day by dividing the total amount by the number of days in the period (usually a year or a month). This is a fundamental step in proration.
Frequently Asked Questions
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