Settlement, Closing, and Real Estate Mathematics
The closing process
Closing transfers title and money. Pre-closing work includes the title search/abstract, payoff figures, survey, inspections, and loan documents. At the table, the settlement statement allocates debits (charges to a party) and credits (money owed to a party). Standard allocations: seller pays for the owner's title policy in many Iowa transactions and pays the transfer tax at recording; buyer pays recording of the deed and lender fees as disclosed. Prorations split ongoing items - property taxes, rent, interest, association dues - as of the closing date.
Math every candidate should drill
- Commission: price × rate, then split by the agreed percentages.
- Proration: (annual amount ÷ 365) × days, with day-of-closing ownership set by contract or custom.
- Loan math: LTV, points (1% of loan), monthly interest (loan × rate ÷ 12), PITI.
- Area: square footage × price per square foot; acreage = square feet ÷ 43,560.
- Investment: NOI ÷ cap rate; price ÷ gross rent for GRM.
Traps
- Reversing debit and credit - a seller's debit is a buyer's credit.
- Prorating on a 360-day or 30-day-month basis when the question specifies actual days.
- Computing commission on the loan amount instead of price.
- Forgetting that a credit to the seller reduces cash at closing.
Worked example: Annual taxes are $3,650 ($10/day). Closing occurs on the 100th day of the year; the seller owned 99 days. Seller owes 99 × $10 = $990 - debit the seller $990, credit the buyer $990, and the buyer pays the full tax bill when due.