Chapter 14 (Computations and Title Closing)

Question 1

Parts of a Fraction

Answer 1

When dealing with fractions, the number below the line is called the denominator.

The denominator always indicates the total equal parts in a whole unit. In the example of the city block above, each part was ½.

The lower number indicates the total number of equal parts (two) in the entire city block.

If the fraction ¼ had been used, the denominator would have indicated that the city block was divided into four equal parts.

The number in a fraction that appears above the line dividing the numbers is called the numerator.

The numerator indicates how many of the equal parts of the whole unit are being counted.

For example, in the fraction ¾, the top number indicates three equal parts are being counted, and the bottom number shows a total of four equal parts, so you are talking about all but one equal part of something (all but ¼).

Question 2

Changing Fractions to Decimals

Answer 2

The line separating the numerator from the denominator means division (the top number is divided by the bottom number).

If you are dividing a fraction using a calculator, enter the numerator first, and then the division key, followed by the denominator.

For example, in the fraction ½: press 1, followed by the division key, and then press 2.

Press the equal sign key (=) and the answer displayed is 0.5.

You have now converted (changed) a fraction (½) into a decimal number (.5).

Question 3

Changing Decimals to Percentages

Answer 3

To change a decimal number to a percentage, move the decimal point two places to the right and add the percent sign (%). (This is the same as multiplying the decimal number by 100.)

If only one decimal number is involved, add a zero to the right of the number.

Question 4

Changing Percentages to Decimals

Answer 4

To change any percentage to an equivalent decimal, simply place a decimal point two places to the left of the number and drop the percent sign (this is the same as dividing the percentage figure by 100).

Examples:
34% = .34
150% = 1.50

If only one number is involved, add a zero to the left to permit moving the decimal point two places to the left.

For example, you want to calculate in dollars the 7½% commission on a house sale price. Convert the fractional part of the decimal number:
½% = 1 ÷ 2 = .5

Next, convert the entire commission percentage to a decimal number.
7½% = 7.5% = .075

Thus, the decimal number .075 is used to calculate the sale commission.

Assume the sale price is $130,000. Calculate the commission.
$130,000 × .075 = $9,750

Question 5

Decimal Place Values

Answer 5

A great deal of the basic arithmetic required to compute routine real estate problems involves decimal numbers.

This review of decimals will be more meaningful if you refresh your memory of the decimal system of place values and the importance of the decimal point in separating whole numbers from fractional parts of whole numbers.

The chart of decimal place values shown below should be memorized if you do not already know the place values.

Notice that the whole numbers are to the left of the decimal point. The decimal fractions of a whole number are to the right of the decimal point.

Question 6

Working with Decimals

Answer 6

To divide a whole number by a decimal—for example, 41,500 divided by 1.85—first enter 41500 into your calculator, press the division key, and then enter 1.85. When you press the equal sign key, the answer will appear in the display.

Question 7

Sale Commissions (Ex. 1)

Answer 7

Let’s begin with an example of a commission calculation. In this example, the property is listed and sold by the same sales associate.

Suppose a broker’s listing agreement specifies that 6½% commission is to be paid on the sale price. A sales associate for the firm lists and sells the property and is to receive 55% of the 6½% sale commission. How much will the sales associate earn after selling the property for $62,000?

Step 1: Find the total sale commission.
$62,000 sale price × .065 rate = $4,030 total commission

Step 2: Find the sales associate’s commission.
$4,030 total commission × .55 split = $2,216.50 sales associate’s commission

More frequently, a property is listed with one brokerage company and sold by another brokerage through the MLS system. Members of the MLS (who are also members of their local REALTOR® association) make an offer of cooperation (“co-broke” or “co-op”) when they place their listings in the MLS. When another brokerage sells the listing, it will receive the portion of the total commission that was specified by the listing brokerage.

Question 8

Sale Commissions (Ex. 2)

Answer 8

A broker’s listing agreement specifies a 7% commission is to be paid on the sale price. The MLS agreement specifies a 50-50 split between the listing and selling offices. If the property sells for $100,000, how much commission is earned by the listing and the selling offices?

Step 1: Find the total sale commission.
$100,000 sale price × .07 rate = $7,000 total commission

Step 2: Find the selling and listing office’s split.
$7,000 total commission × .50 split = $3,500 selling/listing office commission

The selling commission is typically shared between the broker of the selling office and the sales associate who works for the selling office that found a buyer for the property.

The same is true for the listing office and the sales associate who listed the property for the brokerage company.

The percentage that sales associates earn is negotiated between each sales associate and the employing broker, taking into consideration the sales associate’s experience and production.

Question 9

Sale Commissions (Ex. 3)

Answer 9

Let’s assume that the sales associate receives 60% of the total selling office commission. How much commission did the sales associate earn on the previous example? How much did the broker receive for the same transaction?

Step 1: Calculate the sales associate’s split of the selling office commission.
$3,500 selling office commission × .60 split = $2,100 sales associate’s commission

Step 2: Calculate the broker’s split of the selling office commission.
$3,500 selling office commission × .40 split = $1,400 broker’s commission

Question 10

Sale Commissions (Ex. 4)

Answer 10

Today 100% commission arrangements are popular. A sales associate in a 100% commission office receives the entire commission due the respective brokerage office.

Instead of splitting the commission with the broker, the sales associate pays a specified share of office expenses plus a fixed monthly fee.

A broker who lists a property with higher-than-normal value may agree to a graduated (sliding scale) sale commission. This provides an incentive for the broker to get the seller the very best price possible.

For example, the broker has a listing with a seller, and the parties agree to a graduated commission structure. The commission is 5% on the first $200,000 of sale price, 6½% on the next $100,000 of sale price, and 8% on the amount over $300,000. What is the total commission if the property sells for $325,000?

Step 1: Calculate the first increment of commission.
$200,000 × .05 rate = $10,000 first increment commission

Step 2: Calculate the second increment of commission.
$100,000 × .065 rate = $6,500 second increment commission

Step 3: Calculate the third increment of commission.
$25,000 remaining portion of sale price × .08 rate = $2,000 third increment commission

Step 4: Add the commission increments to determine the total commission.
$10,000 + $6,500 + $2,000 = $18,500 total commission

Question 11

Profit

Answer 11

Profit is how much you make over and above your cost.

It may be expressed as an amount or as a percent of your cost.

Question 12

Formulas for Profit and Loss

Answer 12

The formula for profit is:
amount made on sale ÷ total cost = percentage profit

The formula for loss is:
amount lost on sale ÷ total cost = percentage loss

For example, a lot cost $8,000 and sold for $10,000, yielding a $2,000 profit. What is the percentage of profit?
$2,000 ÷ $8,000 = .25 or 25% profit
Example: A
For example, a lot cost $10,000 and sold for $8,000, resulting in a $2,000 loss. What is the percentage of loss?
$2,000 ÷ $10,000 = .20 or 20% loss

For example, a lot sold for $6,000, making a 25% profit. What was the cost of the lot?
100% cost + 25% profit = $6,000
125% = $6,000 selling price
$6,000 selling price ÷ 1.25 = $4,800 cost

For example, a lot sold for $10,000, representing a 20% loss. What was the cost of the lot?
100% - 20% = $10,000
80% = $10,000
$10,000 selling price ÷ .80 = $12,500 cost

Question 13

Title Closing

Answer 13

The consummation of a real estate transaction, when the seller delivers title to the buyer in exchange for payment from the buyer of the purchase price.

Question 14

Pre-closing Inspection

Answer 14

A final walk-through with the sales associate to verify that repairs have been completed and that the property is left in good condition.

Question 15

Preclosing Steps

Answer 15

1. Mortgage application.

If the buyers intend to finance the purchase, they will complete a mortgage application. The contract for sale and purchase specifies the number of days within which the buyer must submit a loan application. The real estate contract typically contains a financing contingency clause that provides for cancellation of the sale contract and return of the buyer’s escrow deposit if the buyer is unable to secure financing.

2. Survey.

The buyer should have the property surveyed to determine the exact location and size of the property and to make sure there are no encroachments, such as a neighbor’s fence across the property line.

3. Appraisal.

Because the property is pledged as collateral for the mortgage loan, the lender will order an appraisal to determine whether the property’s value is sufficient to ensure recovery of the loan amount should a default occur. In a cash transaction, the buyer may want the property appraised to verify the property’s value for tax or investment reasons.

4. Title insurance.

A search is made of the public records for condition of the title and existing liens, judgments, or other encumbrances. The seller is responsible for removing any encumbrances on the title. Typically, there is a simultaneous issue of the owner’s policy and the lender’s policy.

5. Closing documents.

The closing agent, usually a title company or an attorney, prepares the closing documents.

6. Property inspections.

It is advisable for the buyer to have a certified property inspector check the condition of the structure and mechanical parts. An inspection for wood-destroying organisms (WDO), including termites and wood rot, is also recommended and may be required by the lender.

7. Pre-closing inspection.

Before the closing date, the buyer makes a final preclosing inspection (walk-through) of the property with the sales associate. The purpose of the preclosing inspection is to verify that repairs have been completed and the property has been left in good condition.

Question 16

Closing Statements

Answer 16

Florida real estate license law places the responsibility on the broker for an accurate accounting and delivery of all monies, deposits, drafts, mortgages, conveyances, leases, or other documents entrusted to the broker by the parties to the transaction.

The customary method of discharging this responsibility is to have the closing agent prepare and deliver complete and accurate closing statements to the buyer and the seller, plus a summary that reconciles all the debits (charges) and credits involved.

Question 17

Closing Statement Items

Answer 17

It is important for sales associates to have an understanding of the closing documents.

Sales associates should be able to explain and verify the entries on the closing documents.

The day before the closing, licensees should examine and review the HUD statement with the buyer or the seller to correct any errors and explain each entry.

Sales associates usually attend the title closing with the buyer and the seller in case their knowledge of the transaction is needed to assist with answering any questions or concerns that may arise.

Question 18

Prorated Expenses

Answer 18

To prorate means to divide various charges and credits between buyer and seller.

Every sale contract should specify a date and time for prorating items. It is customary when transferring title to have all prorated items determined as of the midnight before the date of closing.

This means that (1) the buyer is charged for property taxes on the day of closing; (2) the buyer is charged for interest on an assumed mortgage on the day of closing; and (3) the buyer is credited for any rental income earned on the day of closing.

In some areas or by negotiation, it is possible that the day of closing will be charged to the seller. In that case, the seller is charged with an additional day.

Prorating is usually required when rents are paid in advance, property taxes are paid in arrears (that is, at the end of the period for which payment is due), and interest on mortgages is paid in arrears (the usual practice).

Therefore, all items that are to become a credit (reimbursed) or debit (charged) to either buyer or seller are prorated because the item applies to both the buyer and the seller.

To prorate costs, two methods may be used: 30-day-month method and 365-day method. The 365-day method is preferred and more accurate.

Question 19

30-Day-Month Method

Answer 19

This method is also called the statutory month method.

In this method, all months are considered to have 30 days (even February).

To use a statutory year (360-day year), determine the yearly cost of the item, divide by 12 to find the cost per month, and then divide by 30 to find the cost per day.

For example, the closing date is July 23. The annual property taxes are $3,400 and have not yet been paid. How much is the seller to pay the buyer for the days the seller owned the property? The day of closing is charged to the buyer.
$3,400 ÷ 12 months = $283.333 per month
$283.333 ÷ 30 days = $9.444 per day

The seller will credit the buyer for 6 months (January through June) and 22 days in July:

$283.333 per month × 6 months = $1,699.998
22 days in July × $9.444 per day = $207.768
$1,699.998 + $207.768 = $1,907.766 rounded to $1,907.77 (debit seller; credit buyer)

Question 20

365-Day Method

Answer 20

This method calculates the proration using the actual number of days in the proration period. To use this method, first divide 365 into the annual cost of the item to find the exact daily rate, and then multiply the number of days involved by the daily rate.

For example, using the same information as in the previous example,
$3,400 ÷ 365 days = $9.315 per day.
The exact number of days owed by the seller are as follows:
January 31 + February 28 + March 31 + April 30 + May 31 + June 30 + July 22 = 203 days
$9.315 per day × 203 days = $1,890.945, rounded to $1,890.95 (debit seller; credit buyer)

Question 21

Prepaid Rent

Answer 21

Normally, any rental income collected in advance belongs to the new owner as of the date of closing; therefore, the unused portion of advance rent belongs to the buyer.

The total rent amount should be divided by the number of days involved in the rental period and allocated on a daily basis.

For example, assume that a property rents for $1,250 per month. The closing date is on the 21st day of a 30-day month.

$1,250 ÷ 30 days = $41.6666667 per day
$41.6666667 × 10 days = $416.67 (due buyer)
$1,250 - $416.67 = $833.33 (earned by seller)

On the closing statements, credit the buyer with $416.67 and debit the seller $416.67.

The $833.33 was earned by the seller before closing and is not mentioned on either closing statement.

Question 22

County and/or City Property Taxes

Answer 22

Property taxes are paid in arrears (at the end of the tax year).

The seller will have had possession and use of the property for some portion of the year, unless the transfer of title is effective on January 1.

To apportion the property taxes fairly, they are prorated on the basis of a 365-day year.

The total tax assessment is divided by the number of days in a year to determine the tax cost per day.

Then the property tax chargeable to the seller, on departure from the property, is calculated by multiplying the tax cost per day by the number of calendar days before title is conveyed.

The resulting amount is entered on the seller’s closing statement as a debit.

It is also shown on the buyer’s closing statement, but as a credit.

The buyer’s share of property taxes is not reflected on either closing statement because the tax bill is not settled at closing.

The buyer pays the entire year’s property tax after November 1, which includes the amount paid to the buyer by the seller.

For example, the closing date is April 15.

The annual property taxes are $2,283.44. The day of closing is charged to the buyer.

The seller will owe the buyer for three months (January through March) and 14 days in April: January 31 + February 28 + March 31 + April 14 = 104 days.
$2,283.44 ÷ 365 = $6.256 per day
$6.256 × 104 days = $650.624, rounded to $650.62 (debit seller; credit buyer)

If the closing occurs late in the year (November or December) and the seller has already paid the taxes for the year, the buyer will reimburse the seller for the remainder of the year.

Thus the buyer will be charged a debit for taxes for the days remaining in the year, but the seller will receive a credit for the same amount.

Question 23

Mortgage Interest on Assumed Mortgages

Answer 23

Because mortgage payments are normally made each month, one month is usually the period used to calculate interest owed.

Interest is paid at the end of the period (in arrears or, in other words, after having the use of the money).

It is therefore charged to the seller up to the date of closing. This item is prorated in the same manner as property taxes.

Interest is figured from the last date for which interest was paid. The exact number of days in each month is used, and interest is figured on a daily basis.

  mortgage balance × annual interest rate ÷ 12 months = month's interest
  month's interest ÷ days in month = daily rate
  daily rate × days interest is owed = prorated interest

Question 24

State Transfer Taxes

Answer 24

Just as buying most things in life involves paying state taxes, so real estate transactions involve the payment of state taxes at closing.

Florida has three types of state taxes that apply to deeds, notes, and mortgages associated with the transfer of ownership of real property.

Question 25

State Documentary Stamp Tax on Deeds

Answer 25

First, the state requires the payment of a tax on deeds and other conveyances.

This state documentary stamp tax on deeds is assessed at the rate of $.70 ($.60 in Miami-Dade County) for each $100 of the full purchase price (or any fraction of $100).

It makes no difference whether the purchase is all cash, all financed, or some combination of cash and financing because this tax is based on purchase price.

This is a one-time tax and is not paid annually.

For example, if a home sells for $71,200, the documentary stamp tax on the deed will be as follows:
$71,200 ÷ $100 = 712 taxable increments
712 × $.70 = $498.40 documentary stamp tax on deed

If any portion or fraction of $100 remains after dividing the purchase price by $100, a full $.70 tax is charged for the fractional part.

For example, if the purchase price in the above example had been $71,250, the state “doc stamp” tax on the deed would be increased by $.70 (to $499.10) because the purchase price was $50 more than an even increment of $100.

The law requires that the seller deliver a recordable deed.

Because a deed may not be recorded until the stamp tax has been paid, the seller is obligated to either deliver a deed having paid the stamp tax or negotiate with the buyer to assume the obligation.

If the buyer does not agree to pay the stamp tax on the deed, the tax remains the seller’s responsibility.

On normal sales or exchanges, the doc stamp tax is shown as a debit to the seller on the closing statement.

Question 26

State Documentary Stamp Tax on Notes

Answer 26

Second, the state requires the payment of a documentary stamp tax on notes for all executed notes and written promises to pay money.

The tax rate is $.35 per $100, or fraction thereof, on the face value of the promissory note.

This tax is paid on all new and assumed mortgage notes.

In an assumption, the borrower pays the tax on the unpaid balance of the note.

This tax is due when the note is executed.

For example, a home sold for $90,000. The buyer paid $10,000 cash, assumed a recorded mortgage of $55,000, and created a new second mortgage in the amount of $25,000.

The documentary stamp tax on notes resulting from this transaction would be as follows:

  $55,000 ÷ $100 = 550 taxable increments × $.35 = $192.50 (assumed)
  $25,000 ÷ $100 = 250 taxable increments × $.35 = $87.50 (new note)
  $192.50 + $87.50 = $280 (tax on notes)

The tax on notes is shown as a debit to the buyer on the closing statement.

Question 27

State Intangible Tax on New Mortgages

Answer 27

Third, the state requires the payment of an intangible tax before a mortgage is recorded, regardless of when the mortgage was executed (signed).

An assumed mortgage recorded previously should not be taxed again, provided the deed or assumption document clearly identifies the county record book and page number where the assumed mortgage was recorded (some counties, however, are taxing an already recorded mortgage a second time).

The tax rate for this state intangible tax on new mortgages is two mills ($.002 or two-tenths of one cent) per dollar of debt.

Because this is supposed to be a one-time tax, examples throughout this book will not show a second intangible tax on previously recorded mortgages.

When a mortgage is recorded, it signifies that the intangible tax has been paid to the clerk of the circuit court or to the county comptroller.

For example, use the figures from the previous example.

The intangible tax on the new second mortgage would be as follows:

  $25,000 × $.002 = $50 tax on second mortgage

The law expects this tax to be paid by the mortgage owner (lender).

However, the mortgagor (buyer-borrower) usually agrees to pay the tax to obtain the loan.

Thus, this tax is normally shown as a debit to the buyer on the closing statement.

Question 28

State Transfer Tax Rates

Answer 28

Stamps on Deed = $.70 per $100
Note, stamps on Notes = $.35 per $100
Intangible on new mortgages = $.002 per $1 of debt

Question 29

Attentions and Functions

Answer 29

To remember the attentions and functions, remember SNI:

Stamps on deed: $.70 per $100
Note, stamps on notes: $.35 per $100
Intangible on new mortgages: $.002 per $1 of debt

For example, to illustrate the application of all three of the previous state taxes, suppose a property sold for $79,950.

The buyer paid $15,000 cash down and arranged for a $64,950 mortgage loan.

The state taxes on this transaction would be as follows:

Deed: $79,950 ÷ $100 = 799.5, rounded up to 800 taxable increments
800 taxable increments × $.70 = $560 tax on deed

Mortgage: $64,950 × $.002 = $129.90 tax on mortgage

Note: $64,950 ÷ $100 = 649.5, rounded up to 650 taxable increments
650 taxable increments × $.35 = $227.50 tax on note

Total: $560 + $129.90 + $227.50 = $917.40

Question 30

Other Charges

Answer 30

1. Preparation of Documents
2. Recording Fees
3. Broker’s Commission
4. Abstract Continuation or Title Insurance
5. Liens

Question 31

Key Concepts Regarding Closing Statements

Answer 31

1. Total purchase price is entered as a credit to the seller and as a debit to the buyer.
2. A (new) purchase money mortgage and assumed mortgage loans are entered as a credit to the buyer and as a debit to the seller (entries are made for both the buyer and the seller because both are involved in the financing).
3. New mortgages from nonseller sources (loans from banks) and the binder deposit (earnest money or good-faith deposit) are entered as a credit to the buyer (there is no entry on the seller’s side).
4. Unpaid property taxes appear as a credit to the buyer and as a debit to the seller (prorations have the same dollar amount in each entry).
5. When a prorated item is paid in arrears (such as interest on an assumed loan and property taxes for closings between January 1 and October 31), “seller days” are used to calculate the proration.
6. When the prorated item is paid in advance (prepaid rent), “buyer days” are used to calculate the proration.
7. Expenses are always a debit to the party paying for the expense (single entries).

Question 32

Cash Reconciliation Statement

Answer 32

When the closing statements for both the seller and the buyer have been completed, the broker or the closing agent is prepared to summarize the entire transaction in a cash reconciliation statement.

This clearly and accurately shows the amount of money deposited by the buyer plus the balance due from the buyer at closing.

It also shows the expenses chargeable to each party, including the brokerage commission and the amount due the seller at closing.

Normally, the person making out the closing statements will have prepared the checks to be disbursed.

After the seller and the buyer examine the closing statements, they should be instructed to sign all copies.

Question 33

Rules of Thumb

Answer 33

The following five general rules of thumb may help the person who is not familiar with the proper preparation of these instruments:

On the seller’s closing statement, the only entries in the credit column are the overall purchase price and any prepaid items.

On the buyer’s closing statement, the total purchase price plus all charges and expenses are entered in the debit column. The resulting total is the key to the buyer’s statement. When all entries in the credit column are totaled, the difference between total credits and total debits is the amount the buyer must pay at closing.

All entries from the total purchase price down through the prorated items, with the exception of
(1) the buyer’s deposit,
(2) an existing mortgage being paid off, or
(3) a new mortgage obtained from a financial institution, are “double entry” items and appear on the closing statements of both parties.
Double-entry items are shown as a credit to one party and as a debit to the other.

All expenses (attorney’s fees, documentary stamps, etc.) are shown on the statement of the appropriate person and are not double entry items.

All items are subject to negotiation between contracting parties.

In the absence of a negotiated agreement, Florida statutes normally regard the parties responsible as follows:

Items credited to seller include the following:
Total purchase price
Other prepaid items

Items debited to seller include the following:
Mortgages assumed or paid off
Mortgages newly created—held by seller (purchase money mortgage)
Prorated taxes, interest, advance rent
Security deposits
State documentary stamps on the deed
Broker's commission
Title insurance (owner's policy)
Preparation of deed
Seller's attorney's fees (if any)

Items credited to buyer include the following:
Earnest money deposit
Mortgages assumed
Mortgages newly created
Prorated property taxes (city and county)
Prorated unpaid interest
Prorated advance rent
Security deposits

Items debited to buyer include the following:
Purchase price
Title insurance (mortgagee's policy)
State intangible tax on the mortgage
State documentary stamp tax on the note
Recording of the deed
Recording of the mortgage
Buyer's attorney's fees (if any)
Preparation of mortgage and note