What happens if my property doesn’t appraise?

As a real estate agent you may have problems with your property not appraising, especially if it is a hot market.  Prices may be rising, but appraisers may only go on previous (lower) sales.  So what does this mean for your buyers?  Let’s take a look at the real estate math behind your appraisal options.

Real Estate Math Example

For this discussion, let’s say that your buyer, Joe White, is enters into a contract to buy a property for $100,000.  He is planning to do a 20% down conventional loan, meaning he needs a $20,000 downpayment and he will borrow $80,000 from the bank.  The bank will loan Joe up-to 80% of the Loan-To-Value (LTV) of the property.

Now what happens if your real estate appraisal comes in at $90,000 instead?

Joe has a couple options:

1) Buy the property anyways and pay a higher downpayment.  Since the property only appraised at $90,000, Joe can only borrow a maximum of $72,000 from the bank.  That means Joe needs to put down $28,000 (instead of $20,000) as the downpayment for the house.  The purchase price is still $100,000.

2) Agree to split the cost with the seller.  You could negotiate with the seller to ask them to reduce the price by some (or all) of the difference.  Let’s say the seller agrees to lower the price to $95,000.  The bank will still only loan up to $72,000, but Joe only needs to put down $23,000 as the downpayment for the house.

3) If Joe has an appraisal contingency as part of his contract, he could choose not to buy the property because it did not appraise.

The appraisal should be reviewed carefully to make sure the appraiser took an accurate assessment of the property.  Perhaps you (or the seller) knows more information about the neighborhood or upcoming closings that the appraiser isn’t aware of.  This new information for the appraiser could help to adjust the price higher.

Interested in more real estate math problems?

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

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Real Estate Math – Calculating Additional Grantor’s Tax Increases

As of July 1, 2013, parts of Virginia began to require an additional “Regional Congestion Relief Fee” as part of the Grantor’s Tax.  Grantor’s Tax is the seller paid taxes to the County when transferring a property.  This amount is shown on the HUD-1 on the seller side of the transaction.

Here is the language of the new increase (taken from http://www.tax.virginia.gov/site.cfm?alias=ChangesandUpdatesFAQ):

The Regional Congestion Relief Fee will be imposed on conveyances of real estate in the Northern Virginia region, beginning July 1, 2013.  The fee is imposed on the consideration or value in addition to any other required recordation taxes and fees at the rate of $0.15 per $100 or fraction thereof.  The fee will be paid by the grantor at the time the deed is recorded in the local Circuit Court. 

Localities in the Northern Virginia region are the Cities of Alexandria, Fairfax, Falls Church, Manassas, and Manassas Park, and the Counties of Arlington, Fairfax, Loudoun, and Prince William.

In order to keep your seller’s informed, you will need to know how to calculate the increase in taxes.  In fact, many sellers tried to get buyers to close the last week of June in order to avoid this additional fee!

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

  1. The rate of the fee – in this case $0.15 per $100
  2. The sales price of the property

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

Mr. Calderone sells his townhouse for $200,000 in Fairfax County.  How much will he have to pay towards the Regional Congestion Relief Fee?

Solution:

The solution to this real estate math problem is:

Since the rate is $0.15 per $100, this translates to 0.0015 x the Sales Price = 0.0015 x $200,000 = $300.  Another way to calculate this is to first divide $200,000 by $100 and then multiple by $0.15 = $2,000 x $0.15 = $300.  Mr. Calderone must pay $300 for the Regional Congestion Relief Fee.

 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.

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Real Estate Math – Calculating Interest

Calculating interest is an essential real estate math question that you may encounter on your real estate licensing exam.  Forbes magazine recently indicated that the interest rate is around 3.87 percent.  As a real estate agent, it is important to know general trends of the rates (are they rising, falling, or staying the same?).  It just takes a quick phone call to your local lender to give you the latest information.  Let’s look at an example of how much interest a buyer will pay through the life of their loan.

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

  1. The loan amount
  2. The number of years of the loan
  3. The interest rate

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

If John gets a 30-year fixed $200,000 loan from ABC Mortgage for 3.87% interest, calculate the total amount of interest John will pay over the entire life of the loan.

Solution:

The solution to this real estate math problem is:

Interest = Loan Amount x Number of Years x Interest Rate

$200,000 x 30 years x 0.0387 = $232,200

 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.

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Real Estate Math – Calculating Property Taxes

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:

If the annual tax rate for a property is $2.10 per $100 of assessed value, what are the annual taxes for a property assessed at $345,000.

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.

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Real Estate Math Understanding Market Statistics

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.

 

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The real estate math behind buying versus renting

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!

 

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Three tips to answering multiple choice real estate math questions

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.

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How to calculate appreciation

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.

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Real Estate Math – How to read a loan amortization factor table

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.

 

Calculating Proration

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.

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