Proration Calculations
Definition
Proration calculations divide shared expenses such as property taxes, insurance, HOA dues, and rent between buyer and seller at closing based on the number of days each party owns the property.
Example
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.
Exam Tip
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 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
Test Your Math Knowledge
Practice with exam-style questions to make sure you can apply Proration Calculations and other math concepts.