Calculating property taxes is an essential real estate math question that you may encounter on your real estate licensing exam.  Each county or jurisdiction will calculate property tax based on the assessed value of the property.

You’ll need to know a few things in order to solve this real estate math problem:

1. The tax rate for your particular jurisdiction – this is usually described per $1000 of the assessed value of the property.  For example, a county may calculate taxes as $1.50 per $100 of the assessed value.
2. You should use the T-method to solve these types of problems since these types of problems highlight the relationship between your assessed value (Total), the tax rate (Rate), and your taxes (Part).

Let’s take an example of the real estate math problem:

Solution:

The solution to this real estate math problem is:

Taxes = Assessed Value x Tax Rate

$345,000 x $2.10 / $100 = $7,245

 Want more practice?

If you’d like more practice with real estate taxes, download our “125 Real Estate Math Problems Solved!”  Click here to get access to 125 real estate math practice problems.

Image courtesy of  FreeDigitalPhotos.net

Today, the Tulsa World published an article about the Tulsa real estate marketing is heating up.  In that article, they reference several common real estate math terms to describe what is happening in the real estate market.  As a future real estate agent, you will need to be familiar with these terms and statistics in your area.  In this post, we will focus on the real estate math term “absorption rate”.

The article says:

Prices are up significantly to an average of $163,368, the inventory of homes on the market has shrunk to 10.2 months, and contracts to sell continue to remain high month after month.

When we talk about the inventory of homes, we are really talking about absorption rate.  The absorption rate is calculated by a two-step process.  First, we determine the average number of sales per month.  Essentially, this is the number of homes “being absorbed” each month.  Second, we determine how many active listings there are currently on the market.  This is the number of homes that “need to be absorbed.”  By dividing the number of homes that need to be absorbed (i.e., active listings by the number of homes being absorbed (i.e., monthly sales), we can get the absorption rate.

Check out our latest Real Estate Math in a Minute on this topic:

The other real estate terms that you should be familiar with include:  monthly sales, new listings, YoY (Year over Year) statistics, and MoM (Month over Month) statistics.  Thankfully, you probably will not have to calculate these yourself (although you should know the real estate math behind these calculations!).  Most MLS providers also have services that will aggregate and calculate these statistics for you.

Image Credit: FreeDigitalPhotos.net

The Wall Street Journal recently published an article indicating that vacancy rates have dropped to 4.7% across the nation, resulting in increases in rents.  As a real estate agent, you may have renters that question whether or not it is cheaper for them to rent or to buy.  While there are many factors to consider (such as how long the person will be living in that area), here’s a few things to tell your prospective buyer to consider from a real estate math perspective:

Consider all of your rental expenses:

• What is your monthly rent?
• What does the rent include and exclude?  Utilities?  Internet?  TV?
• How much would it cost to break your lease early if you decided to buy?

Now consider the expenses of owning a home?

• Do you have enough down payment to buy a place?
• What will your mortgage payment be, including taxes and insurance?  Consider talking with a lender to see what your options are.
• What will your expenses be (e.g., utilities, HOA fee, home repairs)?
• Owning a home allows you to deduct your mortgage interest on your taxes.  Will you get a tax break from owning a home?
• Can you buy a place and rent out one of the rooms?  Or rent out your parking space?  This allows someone else to help you pay for your mortgage!

As we all know, mortgage rates are at an all time low, making a great case for renters to buy.  However, each renter is in a unique financial situation, so in some cases, it may make more sense to rent than to buy. By helping your renter understand the real estate math behind deciding whether to rent or buy, he or she can understand the financial implications of the decision.  Even if your renter decides not to buy, you have helped them make that decision.  When they ARE ready to buy, they will come back to you!

Image Credit: FreeDigitalPhotos.net

On the computer-based real estate licensing exam, you will be asked to answer multiple-choice real estate math questions.  While practicing real estate math questions is an important part of preparing for the real estate licensing exam, you will also need to know strategies to answer multiple choice questions.  This will help you answer questions faster and avoid mistakes on the exam.  Here are three tips to answering multiple choice real estate math questions:

Tip 1.  Read the entire question and all of the answers.

Make sure you read the entire question and know exactly what they are looking for.  It helps to write down the units of the answer (e.g., a percentage, a dollar amount, number of days, etc…).

Tip 2.  Eliminate answers you know are wrong. 

When you read the answers, you might already see some answers you know are already wrong.  On your scratch paper, write down the answer choices (e.g., A  B  C  D) and then cross out the ones you know are wrong.  This helps you to focus on where the correct answer is.

Tip 3.  Work backwards.

If you are down to two choices, you can work backwards by plugging the answer choices into the real estate math question to see if they work.

Example: 

John sells his house for $150,000 and gives his broker $9000 in commissions.  What was his broker’s commission rate?

A.  3%

B.  6%

C.  10%

D.  50%

 Answer: 

First, we read the entire question and all of the answers.  Then, we look to see which answers we can eliminate.  Immediately, we see that 10% and 50% is too high of a commission rate, so we cross those out on our scratch paper.  That leaves us with either A or B.  In this case, we can work backwards.  If John sells his house for $150,000 and gives his broker 3%, then his broker would receive $4500.  Therefore, we can eliminate answer A.  Thus, we are only left with answer B.  If we plug this answer into the real estate math question, then we see that 6% of $150,000 is $9000.

For more real estate math practice problems, check out our free real estate math practice exam or our 125 Real Estate Math Problems Solved workbook, solutions manual, and video explanations.

Photo Credit: FreeDigitalPhotos.net

Recently, CNN published an article on where home prices are rising fastest.  If you are studying for the real estate licensing exam, one of the real estate math questions you may encounter is how to calculate the estimated appreciation (or depreciation) on real estate.  In your local market, it’s important to keep track of the appreciation (or depreciation) for various neighborhoods so you can keep your buyers and sellers up to date on the overall market activity in your area.

Question #1: 

For example, CNN reports that in Medford, OR, the median home price is $144,000, with an estimated appreciation of 20.1% by 2013.  What is estimated appreciation through 2013?  What is the estimated median home price in 2013?

Answer #1:

The appreciation is $144,000 x 20.1% = $28,944

Estimated median price is $144,000 + $28,944 = $172,944.

Question #2: 

For example, CNN reports that in Billings, MO, the median home price is $176,000, with an estimated appreciation of 10.1% by 2013.  What is estimated appreciation through 2013?  What is the estimated median home price in 2013?

Answer #2:

The appreciation is $176,000 x 20.1% = $17,776

Estimated median price is $176,000 + $17,776 = $193,776

For more real estate math practice problems, check out our free real estate math practice exam or our 125 Real Estate Math Problems Solved workbook, solutions manual, and video explanations.

Photo Credit: FreeDigitalPhotos.net

A common real estate math problem you may encounter on your real estate licensing exam will be to calculate a buyer’s monthly mortgage payment based on the amount and terms of the loan.  While calculating the exact monthly mortgage payment is a very complex math problem (i.e., leave it to your buyer’s lender to do the actual calculation), you can provide a ballpark estimate of what a person’s mortgage payment will be using a loan amortization factor table.

A loan amortization factor helps to estimate a buyer’s monthly mortgage payment.  EZ Real Estate Math has a sample loan amortization factor table that you can use for real estate math problems practice.  First, we need to know the terms of the loan (i.e., the length of the loan and the interest rate) in order to look up the amortization factor.  Once we have the amortization factor, we multiply it by the loan amount (calculated in thousands).  This will give us the estimated monthly mortgage payment.  Note that this only include PI (Principal and Interest) and does NOT include taxes and insurance.

Here’s a free loan amortization real estate math problem for you to practice:

Question: 

What is the estimated mortgage payment (PI) for a $250,000 loan at 5% for 20 years?

Answer:

First, we calculate the amortization factor.  Look at the amortization factor table and find the box where the loan term (20 years) and interest rate (5%) intersect.  The amortization factor is 6.60.

Next, we multiple the amortization factor by the loan amount (in thousands) = 6.60 x 250 = $1650.  Therefore, the estimated mortgage payment is approximately $1650.  If we use an online loan amortization calculator and type in the same loan amount and terms, we see that the actual mortgage payment is $1649.  Pretty close for our quick calculation!

For more real estate math practice problems, check out our free real estate math practice exam or our 125 Real Estate Math Problems Solved workbook, solutions manual, and video explanations.

On the real estate licensing exam, you may encounter a proration question.  Prorations occur because not every expense or income can be distributed at closing.  For example, the seller may have already gotten a full month’s rent from a tenant before the closing.  Or the buyer might have to pay real estate taxes at the end of the year (when the seller is long gone).  In order to make sure all income and expenses are accounted for, closing companies will prorate various payments in order to make sure no one needs to come after the transaction to settle any expenses.

While calculating the prorated amount is not difficult, many people find it confusing to determine who gets paid.  To answer this type of real estate math problem, you will have to determine whether the seller owes the buyer money or vice versa.  Since proration problems can be confusing, we put together a cheat sheet on proration problems.

There are only 4 types of prorations – either the amount to be prorated is income or an expense, and either the seller has (or has not) paid it already.  By knowing these two pieces of information, you can determine who gets the prorated amount.  Depending on the situation, you will either determine the proration amount is for the number of days BEFORE closing or the number of days AFTER closing.  Using this cheat sheet in the beginning may help to clarify various types of proration situations you may encounter on the real estate licensing exam.  Also remember that the amount that is debit/credit to the seller is ALWAYS THE SAME as the amount that is credit/debit to the buyer.

Debt to Income (DTI) ratios is an important real estate math concept that you will need to know for your real estate licensing exam.  When your buyers are getting a loan, one of the major factors to qualifying for a loan will be their debt to income ratios (DTI).  Here’s what you need to know:

There are two types of DTI ratios:

• The Front End Ratio is calculated as the percentage of income that will go towards the homeowner’s future PITI (Principal, Interest, Taxes, and Insurance).  Essentially, the bank wants to check that your buyer’s mortgage payment isn’t going to eat up all of their income and that they will have enough for other living expenses.
• The Back End Ratio is calculated as the percentage of income that goes towards all of their debts, including the future PITI, school loans, car payments, credit card payments, etc.  Again, the bank wants to know that your buyer is not already so far in debt that they cannot afford their mortgage payment.

Most banks have a set front-end and back-end DTI ratios that they use as lending guidelines.  In the US, the typical ratios are 0.28 for the front end, and .36 for the back end.  This means that a buyer’s future PITI payment cannot exceed 28% of their monthly income and their total debt (including the future PITI payment) cannot exceed 36% of their monthly income.

On the real estate licensing exam, a common real estate math problem that you may encounter will be to calculate a buyer’s front end or back end ratio.  Another common real estate math exam question will be to calculate the maximum PITI payment based on a buyer’s monthly income and current debt amounts.

Real Estate Math Example

Question:  Doug has a monthly income of $3000.  What is the maximum PITI that Doug can pay using the 0.28 front-end DTI ratio?

Answer:  To get the maximum PITI, you multiple $3000 x 0.28 = $840/month.  Doug can afford a maximum PITI of $840/month.

Question:  Doug decides to buy a new car before he buys a house and incurs a $50/month debt.  Can Doug still afford a $840/month mortgage payment?

Answer:  First, we calculate Doug’s back-end DTI ratio, which is ($840+$50)/$3000 = 0.30.  Since this ratio is less than the typical 0.36 back-end DTI, Doug can still afford the $840/month PITI payment.

For more real estate math practice, check our 125 Real Estate Math Problems Solved Workbook and Solutions Manual.  Bonus video explanations of all questions are also included!

Here is this week’s Real Estate Math in a Minute for January 29, 2012:

Question:

James wants to purchase a house for $220,000.  If his lender wants him to put down 20%, what is his downpayment?

Answer:

When your buyer is getting a loan, their lender will ask them whether or not they want to pay points at closing.  A point is an upfront payment of interest on the loan.  In return for paying points upfront, the lender will offer your buyer a lower interest rate.  For example, a lender could offer a choice between 3.75% with 0 points or 3.5% with 2 points.  Another advantage of paying for points upfront is that you can immediately deduct them from your taxes.

You’ll need to know a few things in order to solve this real estate math problem:

1. One point equates to 1% of the loan amount.

Let’s take an example of the real estate math problem:

ABC Lender offers Mr. and Mrs. Stevens two loan choices for their $200,000, 30-year fixed rate loan.  He offers them a lower interest rate if they can pay 1 point upfront at closing.  How much additional cash must the Stevens have at closing?

Solution:

The solution to this real estate math problem is:

1 point = 0.1 x Loan Amount

$200,000 x 0.01 = $2,000

 Want more practice?

If you’d like more practice with prorations, download our “125 Real Estate Math Problems Solved!”  Click here to get access to 125 real estate math practice problems.

Image: Stuart Miles / FreeDigitalPhotos.net