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Unit 14: Key Points

These are the most important points for you to remember in this unit.

Basic Real Estate Computations

  • Sales Commissions 

Part/Total x Rate or P/TxR

Cover what you want to find and you’ll see the formula.

To find the commission

Cover the P in the formula to get T x R
To find the rate

Cover the R in the formula to get P ÷ T
To find the price 

Cover the T in the formula to get P ÷ R

Commission Splits Between Brokers

In most cases, a cooperating broker sells the listing, so there is a split between brokers.

Find the commission on a cooperating sale

First, get the total commission: Cover the P in the formula to get T x R.
T x R = P
Then, divide the commission between the brokers.

Find a sales associate’s commission on a cooperating sale

You’ll be given the commission split between the brokers, then the split between the broker and the sales associate.

First, get the total commission by covering the P in the formula to get T x R.
T x R = P
Then, divide the commission between the brokers. Then, get the sales associate’s share.

Calculate the profit from a sale

Profit is calculated by subtracting the cost from the sales price.

Calculate the percent profit on a sale

Part/Total x Rate =

P/TxR

To calculate the percent profit, cover the R to get P ÷ T = R

Always use the cost as the “total” in the formula. Cover the R in the formula to get P ÷ T     $110,000  ÷  $230,000 = .478, or 47.8%.

Preliminary steps to a closing

  • Deposit the earnest money.
    • Make the additional deposit, if required—if the buyer fails to make the deposit by the required date, the broker must notify the seller and follow the seller’s instructions.
  • Apply for loan—if a buyer fails to make a complete application by the required date, the broker must notify the seller about the default.
  • Clear contingencies.
  • Lender orders appraisal.
  • Lender notifies about loan approval, then things begin to move more quickly.
  • Order title insurance.
  • Order termite inspection.
  • Home inspection.
  • Order repairs—completed repairs should be inspected by the buyer.
  • Order survey to show any encroachments or unrecorded easements.
  • Buy hazard insurance–the buyer should pay for the first year’s insurance policy at least 30 days in advance if the transaction is expected to close during hurricane season.
    • Deliver hazard insurance policy to closing agent, and
    • Purchase flood insurance if needed.
  • Contact the buyer/seller about closing date.
  • Make preclosing inspection—the sales associate for the buyer should avoid making the inspection because of liability if the sales associate misses something important.
  • Review closing documents before closing.
  • Inform buyer of funds needed to close—most contracts require that the buyer wire the funds to the closing agent so that the closing agent can disburse the same day.
  • Transfer earnest money to closing agent.
  • Other Steps:
    • The buyer should change over utilities effective on the day of closing.
    • Remind the buyer to apply for utility service, change addresses for newspaper, send change of address forms to the postal service, arrange for cable TV/Wi-Fi installation, and to contact yard service companies.
    • The listing sales associate should pick up signs and lockbox.
    • The selling sales associate follows up with the buyer with a courtesy call after closing.

Prorated Expenses

Many expenses and income of the property do not “cut off” on the day of closing and must be apportioned (prorated) between the parties. Some examples include prepaid rent, ad valorem taxes, and mortgage insurance on assumed loans.

  • Normally the prorations are based on a 365-day year, but an exam problem could ask for a 360-day proration. It’s done the same way, just use a different number of days.
  • Normally, prorations are made as of midnight of the day before closing, commonly stated as “the day of closing belongs to the buyer.”
  • Stay alert for exam problems showing the seller has the day of closing.
  • If a test question says the day of closing belongs to the seller, add one day to the seller’s total days.
  • When getting the daily rate, round to five places and use that for prorating.
  • Proration debit and credit entries are always equal.

Prepaid Rent

  • To calculate the amount of prepaid rent the seller owes the buyer,
    get the daily rate: monthly rent ÷ days in the month x number of days the buyer owns the property in the month of closing.
    • Note: Some rent proration problems will also show that the seller has collected a security deposit in the amount of the rent, as well as the last month’s rent.
    • Note: Some problems will show a duplex as the property, but will give the monthly rent for each unit. Don’t forget to multiply by 2.

Ad Valorem Taxes

  • Every closing will have a property tax proration.
  • Property taxes are paid annually, and are due in arrears, meaning the taxes will be paid at the end of the year.
  • To prorate property taxes, divide the annual taxes by 365 days to get a daily rate, then multiply the daily rate times the number of days the seller has owned the property.
    • Note: In some cases, the seller may have already paid the taxes (if the closing occurs in November or December). In that case, figure the number of days the buyer owns the property, multiply the days by the daily rate. Debit buyer credit seller.

Interest on Assumed Mortgages

  • When a buyer assumes an existing mortgage when buying, the mortgage interest must be prorated between the parties.
  • Interest on mortgages is paid in arrears, meaning that the buyer will have to pay the interest for the month of closing, and should get a proration from the seller for the portion of the month the seller owned the property.
  • In most test questions concerning interest on assumed mortgages, the student will be given the mortgage balance and the interest rate. Some questions will also give the monthly mortgage payment, but that’s not used in the calculation.
  • The proration is made by first calculating the annual interest on the loan, dividing it by 365 days, and multiplying the daily rate by the number of days used by the seller in the month of closing. 

State Transfer Taxes

  • Documentary stamp tax is an excise tax imposed on certain documents executed, delivered, or recorded in Florida.
    • The most common examples are documents that transfer an interest in Florida real property, such as deeds; and written obligations to pay money, such as promissory notes and mortgages.
  • Tax is paid to the Clerk of Court when the document is recorded.
  • State Documentary Stamp Tax on Deeds
    • The tax rate imposed on deeds is 70 cents (60 cents in Miami-Dade County) on each $100 or portion thereof of the total consideration.
    • The tax is based on the sale price of the property regardless of the financing and is typically paid by (debited to) the seller.
  • State Intangible Tax on Mortgages 
    • Intangible personal property taxes are payable at the rate of $.002 times the amount of the indebtedness secured by a new mortgage on Florida real property.
    • The intangible tax would not be charged on assumed mortgages or property purchased subject to the mortgage.
    • There is no rounding involved.
    • The buyer usually pays for the intangible tax on the mortgage.
  • State Documentary Stamp Tax on Notes
    • Promissory notes are subject to documentary stamp tax, including new and assumed promissory notes, but not on purchases made subject to the mortgage.
    • The tax rate imposed on notes is 35 cents on each $100 or portion thereof of the total consideration.
    • Tax is due on the full amount of the obligation.
    • The buyer usually pays for the intangible tax on the mortgage.

Other Charges

  • Preparation of Document
    • Typically, the person who signs the document pays for the preparation. The seller signs the deed, and pays for preparation of the deed. The buyer signs the note and mortgage, and pays for their preparation.
  • When a party is charged for an item, it is shown in the closing statement as a debit.
  • Recording Fees–after closing, the deed and the mortgage documents are recorded.
    • The buyer usually pays the recording fees.
  • Broker’s Commission
    • Typically, the seller pays the broker’s commission whether a buyer is using a single agent buyer’s broker.
  • Title Insurance
    • The sales contract will show whether the buyer or the seller pays for title insurance, although it’s usually a buyer’s cost.
    • When financing is involved, the lender will require a lenders’ title policy.

General Rules for Debits and Credits

Items credited to seller 

  • Purchase price
  • Items paid by the seller in advance

Items debited to seller 

  • Recording mortgage satisfaction
  • Items from closing cost details
  • Documentary stamp taxes on deed
  • Broker’s commission
  • Payoff of mortgages
  • Property tax proration
  • Prepaid rent proration
  • Security deposit

Items credited to buyer

  • Earnest money deposit
  • New first mortgage
  • Property tax proration
  • Prepaid rent proration
  • Security deposit

Items debited to buyer

  • Items from closing cost details
  • Mortgage loan costs
  • Appraisal fee
  • Survey
  • Title insurance-lender
  • Title insurance-owner
  • Documentary stamp taxes on note
  • Intangible taxes on mortgage
  • Recording fees
  • Insurance premium
  • Prepaid interest on new mortgage
  • Purchase price