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
Percentage to Decimal Conversion
Converting a percentage to a decimal involves dividing the percentage value by 100.
IRV Formula
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)
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
Gross Rent Multiplier (GRM)
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.
Capitalization Rate
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.
Net Operating Income (NOI)
Net operating income (NOI) is the annual income generated by an income-producing property after deducting operating expenses, but before deducting mortgage payments, income taxes, and depreciation.
Frequently Asked Questions
Test Your Math Knowledge
Practice with exam-style questions to make sure you can apply Proration Calculations and other math concepts.