Let's Solve A Quick Proration Problem....
Real estate students often ask, "How the heck am I supposed to remember how many days are in each month?" When you are solving a proration problem on the exam, it's important to count total days credited and debited accurately.
There is a useful (although somewhat silly) way to remember. Here's a video that shows how:
Remembering how many days there are per month is half the battle in solving real estate proration problems.
First, determine if the exam problem is asking you to use a calendar year or statutory year. A calendar year is the normal 365 day year that we are all familiar with. A statutory year is a 360 day year in which each month has an even 30 days.
If you are using a normal calendar year, you'll need to determine how many days either the the buyer or seller owes in payment to the the other party. You add those days up first.
Here's an example question:
The premium for one-year insurance coverage on a home is $450. If the policy was purchased and paid for by the seller on July 15, 2020 and the closing will take place February 12, 2021, what credit is due from the buyer if he takes over the remainder of the policy at closing? Use a 365-day calendar.
How many days has the seller used? Write them out so you don't lose your place when counting the days:
After you add up all the days, you see that the seller has used 212 days of the one year policy.
Next, you need to find out the daily cost of the policy. In this case the policy is $450 per year.
You need to divide $450 by the 365 days in the calendar year to learn that the cost of the policy is $1.23 per day.
Since you know the seller has used 212 days of the policy, multiply the number of days by the cost per day to learn how much he has "spent" of his investment in the insurance policy.
212 (days used) x $1.23 (cost of the policy per day)= $261.36.
If the original cost of the policy was $450, and the seller used $261.36 worth of it, what credit will the buyer owe the seller at the closing for the unused portion of the policy? You subtract the amount used from the original cost to find out.
$450 (initial cost of the policy)- $261.36 (total of the policy period used by the seller learned by multiplying the daily cost of the policy by the number of days he has used)= $188.64
The buyer will have a debit of $188.64 on the closing statement because he owes money to the seller for the portion of the policy the seller hasn't used. The seller will have a credit for $188.64 because he is receiving money from the buyer as reimbursement for the remaining policy period the buyer will be using after the seller vacates the home.