Real Estate Mathematics, Settlement and Closing Procedures
Real Estate Mathematics
The reliable formulas
Commission = price × rate; split = commission × broker's percentage. LTV = loan ÷ value. Points cost = loan × points percentage. Equity = value − debt. NOI = gross income − operating expenses (no debt service, no depreciation). Cap rate = NOI ÷ price. GRM = price ÷ gross monthly rent. Area: 43,560 square feet per acre; 640 acres per section.
Prorations
Property taxes are prorated on a 365-day year using actual days; rent is often prorated on a 30-day month. The seller is charged (debit) for the days owned before closing and credited for days after; the buyer is the mirror image. Remember the convention: the day of closing typically belongs to the buyer.
Rule of thumb
Divide the annual tax figure by 365 to get a daily rate, then multiply by the number of days the seller owned the property in the year of closing. Estimate quickly: taxes of $6,570 are about $18 per day.
Traps
- Using 360 days for taxes.
- Prorating rent to the seller when the buyer will collect it.
- Computing commission on the loan amount instead of the sale price.
- Forgetting that a percentage increase and the matching percentage decrease do not cancel out.
Worked example
Annual taxes are $6,570 and closing is June 15; the seller owned January 1 through June 15 = 31 + 28 + 31 + 30 + 31 + 15 = 166 days. $6,570 ÷ 365 = $18 per day; $18 × 166 = $2,988. Debit the seller $2,988 and credit the buyer the same amount on the settlement statement.
Settlement and Closing Procedures
New Jersey is an attorney state
Attorneys prepare deeds and conduct residential closings; brokers coordinate but may not give legal advice or draft legal instruments. The typical sequence: contract and attorney review, inspections and mortgage processing, title search and title commitment, survey if required, lender closing package and Closing Disclosure at least three business days before consummation, final walk-through, closing, recording, and disbursement.
Documents and certificates
Deed (bargain and sale with covenants is common; quitclaim conveys only what the grantor has), affidavit of title, title insurance commitment and policy, settlement statement, 1099-S, FIRPTA affidavit when applicable, HOA estoppel or demand letter, flood certification, homeowner's insurance, municipal certificate of occupancy or continued occupancy, and the smoke/carbon monoxide detector certification required at resale.
Transfer fees
New Jersey's Realty Transfer Fee is paid by the seller, computed per $500 of consideration on a graduated scale plus an additional percentage on consideration above the statutory threshold; senior citizen, blind, and disabled exemptions may apply. A separate one-percent supplemental fee applies to buyers of residential property at $1,000,000 or more. Confirm current rates and exemptions with the State calculator before quoting a figure.
Traps
- Promising a buyer an exact transfer fee from memory.
- Closing without the detector or occupancy certificates.
- Releasing keys before the deed records and funds disburse.
Worked example
At closing the seller owes the buyer a credit for taxes paid in advance covering the post-closing period. Debit the seller, credit the buyer for the identical figure; the settlement statement must balance, and the broker's commission is a separate seller debit.