Closing Math: Calculations You Should Know
After you read this guide yo will be able to:
- Calculate the realtor’s commission
- Calculate the seller’s share
- Property taxes
- Rules of proration
- Calculate proration of costs
Calculating the Realtor’s Commission:
When you are selling your home, you’ll sign a listing agreement with the listing agent and his/her brokerage firm. On this listing agreement will be a percentage of the sale price that you are paying the listing agent as commission for their services in helping sell your home.
Typical commission percentages are 6-7% for residential single family homes and can decrease for apartment buildings and expensive luxury homes. The commission is negotiable so there is no set price to recommend you.
Commission is calculated by multiplying the sale price by the commission rate.
For example, if you agree to pay 7% commission and your house sells for $200,000 then the real estate agent would receive $14,000 in commission (7% x $200,000).
If a buyer’s agent is involved, the listing agent may have to split the commission with the buyers agent, which is commonly a 50/50 split. This means the buyers agent would receive $7,000 and the listing agent would receive $7,000 from the $14,000 that the seller paid in commissions.
Remember: the seller is responsible in almost all transactions for the commission’s. The buyer is rarely responsible.
These commissions are paid to the brokerage firm of each of the agents involved in the transaction and then the broker has agreed upon splits with their agents and will disperse the commissions according to their agent/broker split.
Calculating the Seller’s Net Proceeds
The seller’s proceeds is an estimate of the money a seller should receive from a real estate transaction based on a certain selling price after all costs and expenses have been paid.
It’s important to know this rough estimation so the seller can adjust their listing price and know what to accept as a final offer from a buyer.
This calculation tells the seller what he can expect to receive from a transaction after everything has been paid. It will help a seller determine whether or not to accept and offer.
Secondly, the seller needs to know what to expect from the closing such as how much money to bring as opposed to walking away with some. It’s frustrating for a seller to get less money than anticipated because they didn’t understand all the costs and parties involved in the transaction.
It’s pretty straightforward to calculate the net proceeds the seller will receive. You start with the sales price and go down the list deducting the different expenses and costs. One of the major costs that will be subtracted is the mortgage payoff if there is a mortgage on the home.
Costs are open to negotiation with the buyer so be sure to read the purchase contract carefully to see who is paying what.
Typical Seller Costs:
- Mortgage Payoff
- Broker Commission
- Proration of Property Taxes Used
- Proration of Home Owner’s Insurance Used
- Closing Costs
Property Tax: Indiana collects property tax in arrears (after the fact) meaning the seller will have to pay the buyer a credit for the owed property taxes that the buyer will be getting billed for in the upcoming months when it is due. Indiana bills twice a year in May and November.
What is Proration & the Proration Rules
When an expense has been prepaid or has accrued, the buyer and seller will be responsible for a prorated amount. To calculate the proration follow these steps:
- Determine who the expense belongs to
- Determine if the expense is based on calendar, fiscal, or statutory year
- Obtain starting and ending dates for the duration of the expense
- Calculate the number of days between those dates
- Calculate the cost for that amount of time
For example: The sale of a property closes April 20. Taxes are $1,575 per year and are paid in advance. Using a 360 day year, calculate the buyer’s share.
- Who does the expense belong to? – the buyer
- How are dates calculated – statutory year
- Starting and ending dates? – April 21 through December 31 (250 days)
- Annual cost = $1,575 / 360 days = $4.375 cost per day
- $4.375 x 250 days = $1,093 prorated as an expense to the buyer and credit to the seller
Closing Costs to Negotiate
Lastly, let’s list out the different fees and items that will come up in a purchase and sales contract that you’ll likely be able to negotiate. We’ve split these into two different categories: Fees & Items
- Types of Negotiable Fees
- Types of Negotiation Items
Types of Negotiable Fees in a Purchase Agreement for Residential Real Estate
- Escrow Fees
- Transfer Taxes
- Inspection & Reports
- Mandated state disclosures
- HOA transfer fees
- HOA documentation fees
- Owners Title Insurance Policy
Types of Negotiation Items in a Purchase Agreement for Residential Real Estate
- Earnest Money Deposit
- Time period for offer acceptance by the seller
- Time period to complete buyer inspections of the home
- Time period for the buyer to obtain loan approval
- Time period to obtain an appraisal of the home
- Time period for the seller to submit disclosures to the buyer
- Personal property items that remain with the home
- Time period for final walk through
- Time period for closing escrow
- Time period for possession
- Time period for releasing contingencies
- Dispute resolution
- Fixtures that might be excluded from the sale
I would encourage both sides, buyer and seller, to thoroughly read the contracts just as a lawyer would. Talk with your real estate agent about these different items that will need negotiating so you both are on the same page for your needs and aspirations.
Overall, you’ve learned in today’s article how to calculate the realtor’s commission and how to calculate your estimated net proceeds from the sale of your home. We also covered the rules of proration and the items you potentially can negotiate in a contract with either the buyer or seller. Now you are prepared for closing and will not have unexpected surprises pop up when going over the costs of the transaction. You’re also prepared for analyzing the settlement statement.
I recommend reading a few follow up articles to further understand closings and the math involved. Here is the ultimate guide to closing and settlement statements you can start with!
Contact Kevin Foy, Realtor
Kevin is a real estate broker-associate with RE/MAX Oak Crest Realty in Elkhart, Indiana and has served real estate clients for over 35+ years in Northern Indiana and Southern Michigan.
To get ahold of Kevin for real estate services:
- Phone: 574-536-9218
- Email: Kevin@TeamFoy.com
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