Alabama Real Estate Exam Math Review 2018 Steve McTyeire, MBA Alabama Real Estate Instructor Broker in Alabama, Florida & Georgia SteveMcT@gmail.com 205-807-5200

Pre-License Math Review 13% of general knowledge questions

Real Estate Test Topics Salesperson Test Questions # Agency Relationships & Contracts 28 Real Property Ownership 13 Finance 14 Real Property 14 Market Regulations 10 Property Management 8 Real Estate Calculations 13 Total General Knowledge 100 Alabama Law 40 Total Questions on Test 140

Math Learning Objectives: Understand how commissions work Calculate commission Learn how Debits and Credits work Calculate proration, points Understand how loan values are determined Determine how measurements are calculated Learn how are investment returns relate to price

7. Real Estate Calculations Compensation, Commission, and Fees Valuation / Market Sale Price and Yields Net to Seller, Cost to Buyer (Credits & Debits) Tax and Other Prorated Items Points Loan-to-Value Ratios Measurements (Square Footage, Acreage, Volume) Property Management / Investment (Rate of Return)

7 A. Compensation, Commission, and Fees Compensation may be a % of sale price, hourly rate, flat fee or any agreed method Never set commissions between competitors No “going” or “standard rate” Violation of Anti-Trust Laws % of sales price (commission) is most common Normally split between Listing and Selling Brokers Usually equally split, but not required Brokers split with Agents Office % will vary, and other fees may apply National franchise fee is common

: : 7 A. Compensation, Commission, and Fees X Piece Results Base Whole Pie Rate Size of Piece X T Formula = math magic

: : X .25 7 A. Compensation, Commission, and Fees Piece Results 25 cents 100 cents : Base Whole Pie Rate Size of Piece 25% .25 Quarter X T Formula = math magic

: : 7 A. Compensation, Commission, and Fees X Pie X Size = Piece Piece Results Divide : Piece / Pie : Divide : Piece / Size Base Whole Pie Rate Size of Piece X Piece / Pie = Size Piece / Size = Pie Multiply X Pie X Size T Formula = math magic

: : 7 A. Compensation, Commission, and Fees X T formula Piece Results Base Whole Pie Rate Size of Piece % X % of sales price most common compensation Whole Pie is Price of House X Size of Piece of Pie

: : 7 A. Compensation, Commission, and Fees X When top number is known, Enter it first in calculator Divide Top Number by Bottom Number Divide Top Number by Bottom Number Piece : Results : Base Whole Pie Rate Size of Piece X Multiply Bottom Numbers

: : 7 A. Compensation, Commission, and Fees X 10% commission on $100,000 sale is $10,000 Small number on top 10,000 Piece : Results : Base Whole Pie Rate Size of Piece To convert % to decimal, move point two places left 10. % Becomes 0.10 decimal Big number on bottom X 100,000 0.10 10.% Change percentage to decimal

: : 7 A. Compensation, Commission, and Fees X What is commission rate on sale? 10,000 : Results : Base Rate X 100,000 ??? Divide results, $10,000 by base $100,000 = rate

: : 7 A. Compensation, Commission, and Fees X What is commission rate on sale? 10000 : Results : Base Rate X 100000 0.10 Divide results, $10,000 by base $100,000 = rate

: : 7 A. Compensation, Commission, and Fees X What is sale price? 10,000 : Results : Base Rate X ??? 10 % commission 0.10 Base = results 10,000 divided by rate 0.10

: : 7 A. Compensation, Commission, and Fees X What is sale price? Results : Base Rate X 100,000 sale price 0.10 commission % Base = results 10,000 divided by rate 0.10

: : 7 A. Compensation, Commission, and Fees X What is commission amount? ??? : Results : Base Rate X 100,000 sale price 0.10 commission % results = base 100,000 times rate 0.10

: : 7 A. Compensation, Commission, and Fees X What is commission amount? 10,000 : Results : Base Rate X 100,000 sale price 0.10 commission % results = base 100,000 times rate 0.10

7 A. Compensation, Commission, and Fees 30% of questions will require two or more steps to solve Question may be: Sale $100,000 at 10%, Solve Brokers split 50/50, Solve National Franchise fee 6%, Solve Agent split is 70% Solve How much is agent’s check? Answer to question

: : X Question may be: Sale $100,000 at 10%, Brokers split 50/50, National Franchise fee 6%, and agent split is 70% How much is agent’s check? What is commission split for each Broker ???? : Results : Base Rate X 10,000 0.50 Each broker received 50% We have the total Commission from last problem

: : X Question may be: Sale $100,000 at 10%, Brokers split 50/50, National Franchise fee 6%, and agent split is 70% What was agent’s check? What is commission split for each Broker 5,000 : Results : Base Rate X 10000 0.50

: : X Question may be: Sale $100,000 at 10%, Brokers split 50/50, National Franchise fee 6%, and agent split is 70% What was agent’s check? ???? Agent’s Check amount : Results : Base Rate X 5,000 X 0.94 Deduct National Franchise fee 6% off gross commission Broker received 100% - 6% 0.70 Agent % split You may be given broker split

: : X Question may be: Sale $100,000 at 10%, Brokers split 50/50, National Franchise fee 6%, and agent split is 70% What was agent’s check? 3,290 Agent Check : Results : Base Rate X 5000 X 0.94 = 4,700 After National Franchise fee 0.70 Agent % split

100,000 X 0.10 X 0.50 X(1.00 – 0.06) X 0.70 = 3290 Question may be: Sale $100,000 at 10%, Brokers split 50/50, National Franchise fee 6%, and agent split is 70% What was agent check? 100,000 X 0.10 X 0.50 X(1.00 – 0.06) X 0.70 = 3290 Sales Price X Commission X Broker Split X National fee X Agent = Agent’s Check

Another way is to visually draw cash flow Sales Price X commission rate = Total Commission splits between brokers Divide > < Multiply Listing Agency % Selling Agency % Listing Broker Listing Agent Selling Broker Selling Agent

< Multiply Divide > Sales Price $100,000 Total Commission 10% or 0.10 Divide > < Multiply $10,000 $3,500 / 0.70 / 0.50 / 0.10 = $100,000 Listing Agency % $ 100,000 X 0.10 X 0.50 X 0.40 = $2,000 50% or 0.50 Selling Agency % $5,000 $5,000 Listing Broker Listing Agent Selling Broker Selling Agent 40% or 0.40 60% or 0.60 30% or 0.30 70% or 0.70 $ 2,000 $ 3,000 $ 1,500 $ 3,500

On your first sale, your check was $4,321.00 Your split with your broker is 70% / 0.70 How much did your broker receive $6,172.86 You sold another agent’s listing Other broker split with your broker 50% / 0.5 What was total commission? $12,345.71 Sale paid gross commission of 5% / 0.05 What is price of home? $246,914.29 $4,321 / 0.70 / 0.50 / 0.05 = $246,914.29 Or work backward from sale price $246,914.29 X 0.05 X 0.5 X 0.70 = $4,321

: : 7 A. Compensation, Commission, and Fees X What is the sale price when commission is 18,563, rate of 3.7% 18,563 Small number Piece of Pie : Results : Base Rate X ???? 0.037 (3.7%) Big number Whole Pie Size of Slice of Pie Always expressed as %

7 A. Compensation, Commission, and Fees What is the sale price when commission is $18,563, rate of 3.7%

: : 7 A. Compensation, Commission, and Fees X What is sale price if commission is 18,563 at rate of 3.7% 18,563 Divide results by rate : Results : Base Rate X 501,702.70 0.037

You can always work problem if you know two numbers 7 A. Compensation, Commission, and Fees You can always work problem if you know two numbers What is commission on sales price of 765,432 at rate of 2% ??? : Results : Base Rate X ???? ???

: : 7 A. Compensation, Commission, and Fees X What is commission on sales price of 765,432 at rate of 2% ??? : Results : Base Rate X 765,432 0.02

: : 7 A. Compensation, Commission, and Fees X What is commission on sales price of 765,432 at rate of 2% 15,308.64 : Results : Base Rate X 765,432 0.02

: : 7 A. Compensation, Commission, and Fees X Seller wants to add your 5% commission to 100,000 she needs to net from sale What is listing price? 100,000 : Results : Base Rate ???? 0.95 X 100% - 5% Commission Seller will get 95% of proceeds Broker gets 5% This is not a “net listing” “net listing” is when seller tells you to keep anything above a given price

: : 7 A. Compensation, Commission, and Fees X Seller wants to add your 5% commission to 100,000 she needs to net from sale What is listing price? 100,000 : Results : Base Rate 100% - 5% Commission X 105,263 Needed to net 100,000 0.95 Seller will get 95% of proceeds Can’t just add 5% to sales price and get 105,000 Multiplying 5% commission times 105,000 will net seller 99,750

: : 7 A. Compensation, Commission, and Fees Oh No, now buyer needs closing cost of $5,000 added to price in addition to: Seller wants to add your 5% commission to 100,000 she needs to net from sale 100,000 net needed by seller + 5,000 buyer’s closing cost = 105,000 Total needed by seller : Results : Base Rate 100% - 5% Commission X ????? Needed to net 100,000 0.95 Seller will net 95% of proceeds You get 5% Risk of adding commission and closing cost: property may not appraise for that amount

: : 7 A. Compensation, Commission, and Fees Oh No, now buyer needs closing cost of $5,000 added to price in addition to: Seller wants to add your 5% commission to 100,000 she needs to net from sale 100,000 net needed by seller + 5,000 buyer’s closing cost = 105,000 : Results : Base Rate 100% - 5% Commission X 110,526 Needed to net 100,000 0.95 Seller will net 95% of proceeds Yes, You get paid commission on buyer’s closing cost

7B. Valuation / Market Sale Price and Yields T Formula will be used for many other math solutions

7B. Valuation / Market Sale Price and Yields The market has depreciated 5% each year for the past 7 years A home just sold for 157,382 What was its estimated purchase price seven years ago?

7B. Valuation / Market Sale Price and Yields 157,382 : Results : Base Rate X 242,126 0.65 100% - ( 5% X 7)

7B. Valuation / Market Sale Price and Yields Market has appreciated 5% each year for past 7 years Home was purchased for $88,888 7 years ago What is its estimated market value today? Ignore compounding

7B. Valuation / Market Sale Price and Yields Big Number 119,999 : Results : Base Rate If Rate is >1 The big number will be on top Small Number X 1.35 88,888 100% + (5 X 7) = 135% + Appreciate - Depreciate

7B. Valuation / Market Sale Price and Yields If numbers are in wrong place, you will know it $88,888 : Results : Base Rate $119,999 X 74% You will get this wrong number as one of multiple choices

7 A. Compensation, Commission, and Fees Other Agent Fees May Apply Brokerage fees vary by broker, but may include: Transaction fee per closing $300 National franchise fee 6% of gross commission National advertising fee $300 per month Other Office Fees: Copies, Desk, Phone, Computer - varies E&O Insurance $500 per year or % of each sale MLS Dues (Multiple Listing Service) $35 to $50 per month Board of REALTOR© Dues (Trade Organization) $500 or more per year Other Trade Groups (NARPM) (CCIM) varies Training about $10 hour

7 A. Compensation, Commission, and Fees Some agents have licensed assistants Allowing them to be more efficient and productive Licensed assistants may perform any activities that require real estate license (BARN SALE) Unlicensed assistants can’t BARN SALE Compensation can be anything agreed on Doesn’t have to be a percentage, may be Fee to hold an open house Fee to show properties Fee, plus a percentage Hourly rate to do anything needed Most compensation must come from commission to remain independent contractor Only Broker can pay licensed assistants

7B. Valuation / Market Sale Price and Yields This section is about how to value properties Market Value is based on what has sold recently to determine a price for subject property Cost Approach is based on what it would cost to build another similar property Capitalization Rate is based on what an investor will pay for a cash flow

7B. Valuation / Market Sale Price and Yields Principle of Substitution Most 3 bedroom 2 bath homes of about same Square Footage sq. ft. in same neighborhood of same type, age, condition, and other things being equal, will sell for about same price When a property is overpriced, it will stay on market longer and get lower offer

7B. Valuation / Market Sale Price and Yields Market Value = perceived value ( Listing Price) Market Price = what check was written for when it sold Cost = what it would take to build another one like it Replacement cost = using current methods (fire destroys a house) Reproduction cost = exactly like it was ( fire destroys historical building) These three numbers will normally be equal only in new construction

7B. Valuation / Market Sale Price and Yields Market Value is a price an agent will advise seller or buyer on, based on research of what has sold recently for similar properties. CMA (Comparative Market Analysis) (comps) Appraisers will use much of the same information, but in more detail to give their opinion of value at a point in time

7B. Valuation / Market Sale Price and Yields Agent’s CMA

Appraiser’s CMA More Details

7B. Valuation / Market Sale Price and Yields Cost Approach is used to value special buildings like schools, churches, libraries, or any other type not normally sold or used as an investment Most difficult method of evaluation What would it cost to rebuild a similar structure ??? Using current building methods is replacement Building exactly like it was originally build is reproduction Deduct the wear and tear (depreciation) ??? This is actual depreciation; different from accounting depreciation Add the value of the land ??? Land does not depreciate = Estimate of Value ???

7B. Valuation / Market Sale Price and Yields Cost of materials Easiest method is cost per square foot New construction is about $80 Sq. ft. Land cost is separate (usually about 20% of total value) Estimate physical depreciation Curable (deferred maintenance) Incurable (major foundation issues) Land does not depreciate (accounting) Obsolescence Functional (5 bedroom, 1 bath) External (landfill next door)

7B. Valuation / Market Sale Price and Yields Appraiser gathers information for: Sales Comparison (CMA) Comparative Market Analysis Cost Analysis Income Approach Each will be given a weight value based on its importance A single family home will have a very high weight for: Sales comparison 85% Lower weight for: Cost analysis 10% Income 5% or less These weighted averages are called reconciliation Value for property will be appraiser’s opinion of value When done for VA (veteran) loan, is called CRV (certificate of reasonable value)

7B. Valuation / Market Sale Price and Yields Gross Rent Multiplier (GRM) to estimate market value Rent Price times a multiplier is determined by: Other properties worth about $100,000 rent for $1,000 per month in this area GRM is $100,000 / $1,000 = 100 A home rents for $850 What is its market value based on GRM of 100? 850 X 100 $85,000

7. C Net to Seller, Cost to Buyer (Credits & Debits) + Credit is money added + - Debit is money subtracted - Seller Credit Debit Buyer Purchase Price 100,000 Loan 80,000 80,000 Tax Proration pre-paid 1,000 1,000 Earnest Money Attorney Fee Split 600 300 Commission 5,000 Loan Cost 2,000 2,000 Cash Totals 95,700 Cash to Seller 22,300 Cash from Buyer

7. C Net to Seller, Cost to Buyer (Credits & Debits) HUD Form

7. C Net to Seller, Cost to Buyer (Credits & Debits) Required Net Sheet Agent’s best estimate for cost of sale

7. D Tax and Other Prorations Property Tax is paid a year in advance Due October 1st, must be paid by Dec 31 When a parcel sells in middle of tax year, seller will have already paid tax for entire year Half year will be prorated as a: Credit to seller, and a Debit to buyer Other Prorations work same Pay for what is used, based on closing date Question may give number of days and month closed

7. D Tax and Other Prorations Taxes are computed on the assessed value (AV) This is not appraised value, but may be close Different classes of property have different tax rates RCA IS zoning classifications (districts) R Residential C Commercial A Agricultural I Industrial S Special Purpose

7. D Tax and Other Prorations Property is taxed at % of assessed value (AV) Homesteaded property is taxed at 10% of AV A $100,000 AV, homesteaded home will be taxed @$10,000 Non-homesteaded property is taxed at 20% of AV A millage rate is applied to the AV based on government services such as schools, police, fire, libraries 10 mils is $100 tax per $1000 of AV $10,000 AV gets a tax bill of $1,000 @ 10 mils Non homesteaded homes are taxed at 20 % of AV A non-homesteaded property will have a tax bill of $2,000 @ 10 mils Prorated on date of closing Homestead exemption excludes $5,000 in home value from creditors

7. D Tax and Other Prorations Capital Gains Tax is paid on gain in value less expenses of sale upon sale of an investment property held for over one year at a rate of 15% as of 2017 If held under a year, is taxed at ordinary income tax rates Learn about 1031 tax exchanges (defers tax) Different rules apply to owner occupied homes Remember that you do not give tax or legal advise

7. D Tax and Other Prorations Rental home was bought for 100,000 in 2005 Cost to acquire property $5,000 Cost to sell property $5,000 Property sold for $140,000 this year (2017) 140,000 Sale price - 10,000 Cost to buy and sell -100,000 Original Cost 30,000 Profit X .15 = $4,500 Capital Gain tax due Do not give tax or legal advice

7. D Tax and Other Prorations Interest is paid in arrears (past) A loan closes in middle of January First payment will be due March 1st This will include interest for February Interest for January is prorated for half month This will be paid at closing Attorneys only accept cashier’s checks

Buyer’s income = $4,000 month Conventional loan qualifications are: Ratios are .28 of income, front end Income of 4,000 X .28 = $1,120 allowed loan payment .36 total debt, back end 4,000 X .36 = $1,440 (total debt allowed, including loan payment) Total debt allowed $1,440 – loan payment $1,120 = $320 in other recurring debt payments Car Credit Cards Other Loans

How much house payment is allowed for $4,000 monthly income? 4000 X .28 = 1,120 How much loan is possible at 6% interest Interest factor of 6 1,120 / 6 = $186,666

7. E Points Point = 1% (0.01) of LOAN amount, not Purchase Price 1 Point on $100,000 loan = $1,000 1 Point increases lender’s yield by 1/8 of 1% Paying points may be used to buy-down interest rates Points may also be included to pay closing cost Common among builders to buy-down rate short term (2 years), Because buyer can qualify for larger loan at lower rate Points builder pays are already included in purchase price When paying cash or using another lender, negotiate a lower price

7. E Points Buyer can qualify for a larger loan when interest rate is lower Lenders will use points to cover closing cost if needed Add 1/8 % to loan interest rate for every 1% of purchase price to cover loan closing cost

7. E Points $350,400 loan Buyer paid origination fee of 1 point A point is 1 % of loan - Not purchase price How much is origination fee? $3,504 Buyer paid 3 discount points Increases lender’s yield by 3/8 % How much for discount points? $10,512 Origination fee and discount points are based on loan amount May be added into loan

7. E Points $100,000 loan that needs $4,000 in closing cost will need 4 points to cover these cost Lender can add $4000 into financing charges using points 4 points will add ½% to the loan ( 1/8 X 4 ) If market interest rate is 5%, lender will make loan at 5 ½% Payment on a 100,000 loan at 5% for 30 years is $536 Payment on a 100,000 loan at 5 ½% 30 years is $567 Buyer may be willing to pay $31 more per month to get loan Long term cost to do this $31 X 360 months = 11,160

7. E Points Points are added to an FHA loan for mortgage insurance premium (MIP) FHA loans typically are made to borrowers who lack down payment, which makes the loans riskier FHA borrower may get a loan at a lower credit score than conventional loan. Advertised APR (annual percentage rate) will have ½% added APR is 4% + MIP ½% total interest rate 4.5% Borrower may request MIP to be removed when LTV is below 80% Based on original value and loan amount

7. F Loan-to Value Ratios 80% (LTV) Loan to Value conventional loan Lender will loan 80% of the Purchase Price (LTV) If appraisal is equal to purchase price or higher FHA is 96.5% LTV VA is 100% LTV May get Rural USDA loan at 100% VA appraisal is called a Certificate of Reasonable Value Conventional is usually 80% LTV, above this amount requires (PMI) Private Mortgage Insurance Different from mortgage insurance premium MIP on an FHA loan If the borrower’s credit is really good they can get a second mortgage for part of the 20% down to avoid the PMI on the 80% Seller may hold part of the down payment as a second mortgage This is called a purchase money mortgage

7. F Loan-to Value Ratios : : 80% (LTV) Loan to Value on a $100,000 Purchase Price = 80,000 Loan : Results : Base Rate 80% LTV 0.80 X 100,000 Purchase Price

7. F Loan-to Value Ratios : : What is the Purchase Price if the loan is 176,000 @ 96.5% LTV? : Results : Base Rate X

7. F Loan-to Value Ratios : : What is the Purchase Price if the loan is 176,000 @ 96.5% LTV? 176,000 : Results : Base Rate 96.5% LTV 0.965 X ?????

7. F Loan-to Value Ratios : : What is the Purchase Price if the loan is 176,000 @ 96.5% LTV? 176,000 : Results : Base Rate 96.5% LTV 0.965 X 182,383

7.G Measurements (square footage, acreage, volume) Real estate area measurements are in: Square Feet = Width in feet X Depth in feet Volume For volume multiply the square footage by height

7.G. Measurements (square footage, acreage, volume) An acre is 43, 560 square feet (sq. ft.) or sf (7),(11) store clerk will know Visualize by comparing it to a: Football field is 45, 000 square feet A mile is 5,280 feet Oak Mountain is 5 miles down highway 280 from Homewood A section is 1 mile X 1 mile How may feet of fence will it take to go around a section? 5,280 X 4 = 21,120 4+3, 5+6

7.G Measurements (square footage, acreage, volume) Lot size 450’ X 484’ = 217,800 sq. ft. Structure size 60 feet X 40 feet = 2,400 square feet Lot 1 , Block 1, Brown Acres 484 feet deep Spot’s House 40 feet 60 feet 450 feet across – Front Foot Easy street

What is property’s market value? 7.G. Measurements (square footage, acreage, volume) What is property’s market value? Calculating lot size Lot is 450’ x 484’ = 217,800 square feet (sq. ft.) First # is front foot (street) Land in this area sells for about $30,000 per acre What is market value of this lot? You will need to know how many sq. ft. in an acre Stop at 7/11 store and ask clerk 217,800 / 43,560 = 5 acres x $30,000 = $150,000 Lot sf acre sf price per acre market value

7.G Measurements (square footage, acreage, volume) What is value of house? Spot’s house is 60’ x 40’ = 2400 square feet Only heated and cooled area above ground is included in living area Comparable homes sell for about $120 per square foot plus land cost 2400 square feet X $120 per sq. ft. = $288,000 General value rule is land about 20% , home about 80% We already know land market value to be $150,000

7.G. Measurements (square footage, acreage, volume) What is the market value for this house and land? 2400 x $120 = $288,000 house + $150,000 land = $438,000 total value Market Value, Price, and Cost are not necessarily related Except in new construction Principle of substitution Can you get another one like it for less? Principle of conformity Most homes in an area will be similar

: : X Property sold for $438,000 Commission was $21,900 What was Rate? Results : Base Rate X

: $21,900 : $438,000 ??? X Property sold for $438,000 Commission was $21,900 What was Rate? $21,900 : Results : Base Rate $438,000 X ???

: $21,900 : $438,000 0.05 X Property sold for $438,000 Commission was $21,900 What was Rate? $21,900 : Results : Base Rate $438,000 X 0.05

: : Commission was $8,000 Rate was 8% What was price of property? X Results : Base Rate X

$8,000 : Results : Base Rate $100,000 X .08

: : Seller wants $100,000 net Seller said add commission to price Commission is 10% What is selling price? : Results : Base Rate X

: $100,000 : $111,111 100% - 10% = .90 Seller nets 90% X Results Base Rate $111,111 X 100% - 10% = .90 Seller nets 90% Test question will give option to answer wrong if you just add 10% 90,909 100,000 110,000 111,111

: : X Discount Points 2 points = 2% of prepaid interest $4,000 paid in discount points How much is loan? : Results : Base Rate X

$4,000 : Results : Base Rate $200,000 X 0.02

: : Seller made $25,000 profit on $100,000 sale What is profit % X Results : Base Rate X

: 25,000 Profit when sold is result : 100,000 – 25,000 Results : Base Rate 100,000 – 25,000 Base was $25,000 Less when bought X .33 or 33%

: $1,000 X 12 $12,000 annual income : 0.10 $120,000 ROI Results : Base Rate X 0.10 ROI Return On Investment $120,000 Price investor would pay

: : X Investor expects a 10% ROI (return on investment) Monthly net income is $1,000 Expenses including vacancy 25% $1,000 rent X 12 months X .75 $9,000 net income : Results : Base Rate X $90,000 Market value of cash flow 0.01 expected ROI

: : X What did an investor pay if they made 10% when they sold the home for $100,000 : Results : Base Rate X

$100,000 : Results : Base Rate $90,909 X 100% + 10% = 1.10

: : The value of a house is $91,000 today. What was the original cost if it has depreciated 5% per year for the past seven years? : Results : Base Rate X

$91,000 : Results : Base Rate $140,000 X 100% - (5% X 7) = 0.65

: : X If a home is worth $91,000 today It appreciated 5% for past 7 years, What was original price? : Results : Base Rate X

: : $91,000 $67,407 Original Price is base 100% + (5% X 7) = 1.35 X If a home is worth $91,000 today It appreciated 5% for past 7 years, What was original price? $91,000 : Results : Base Rate X $67,407 Original Price is base 100% + (5% X 7) = 1.35

If a home is worth $91,000 today It appreciated 5% for past 7 years, What was original price? If numbers are in wrong place, wrong answer will be obvious $122,850 $91,000 : Results : Base Rate X $67,407 100% + (5% X 7) = 1.35 $91,000 Test question will give option to answer wrong 67,407 91,000 122,850 135,000

What did owner originally pay for home if it sold for $98,672 today, which gave a 12% profit over original cost? : Results : Base Rate X

What did owner originally pay for home if it sold for $98,672 today, which gave a 12% profit over original cost? $98,672 : Results : Base Rate X $88,100 100% + 12% = 1.12

: : X 90% loan-to-value on a $88,500 house, $4,500 earnest money with contract How much more money needed? : Results : Base Rate X

90% loan-to-value on a $88,500 house, $4,500 earnest money with contract How much more money needed? $8,850 : Results : Base Rate $88,500 X .10 $8,850 - $4,500 (Earnest Money) = $4,350 Additional down Test will give opportunity to not read part of question about earnest money $8,850 will be one of answers

: : X What was original price of home if it sold today for $98,672 which gave a 12% profit over original cost after paying $5,000 of buyer’s closing cost? : Results : Base Rate X 83,635 93,672 98,500 106,445

: : X What was original price of home if it sold today for $98,672 which gave a 12% profit over original cost after paying $5,000 of buyer’s closing cost? $98,672 - 5,000 = 93,672 : Results : Base Rate X $83,635 100% + 12% = 1.12 83,635 93,672 98,500 106,445

300 is 3% of what number? : Results : Base Rate X

300 : Results : Base Rate X 10,000 0.03

7. H. Property Management / Investment (ROI) Property Management is about helping an owner maximize return on their investment (ROI) Beside cash flow from rent, there are other income sources Pet fees Late fees Other expenses of ownership TIM Property Taxes Insurance Maintenance We will ignore these other incomes and expenses

Return on Investment https://www.auction.com/blog/how-to-calculate-roi-on-residential-rental-property/

: : 7 H. Property Management / Investment (ROI) X The same formula we have been using works with ROI Income : Results : Base Rate X Return on Investment ROI Investment

What is a 15% ROI on a $1,000,000 investment? : Results : Base Rate X

$150,000 : Results : Base Rate $1,000,000 0.15 X

: : Monthly rent is $15,000 Investor wants a 12% ROI What will investor pay? : Results : Base Rate X

: : $15,000 X 12 months = $180,000 $1,500,000 X 0.12 Results Base Rate This is the most an investor will pay for a 12% ROI

7 H. Property Management / Investment (ROI) Investment Property will sell based on Capitalization Rate = Cap rate = Return on investment = ROI (Yield) Investors may demand a 12% Return on this type property It could be 15% or any number You may not get the net income, but be “given” the numbers to calculate it The way to calculate net income is GIVEN GI 100,000 Gross Income: 100 apartments renting for $1000 per month V - 5,000 Vacancy is 5% (of Gross Income) E - 30,000 Expenses are 30% (of Gross Income) N = 65,000 Net Income for one month (Before Taxes) To calculate annual net income, multiply month by 12 = $780,000

7 H. Property Management / Investment (ROI) $65,000 monthly rent X 12 months $780,000 annual income : Results : Base Rate $6,500,000 X 0.12 Estimated Market Value Based on a 12% Cap Rate

7 H. Property Management / Investment (ROI) This apartment building was on the market for over 2 years, then you got an offer for $5,000,000 which the owner accepted What is Capitalization Rate ( Cap Rate)?

7 H. Property Management / Investment (ROI) Net income is the same $780,000 : Results : Base Rate $5,000,000 X 0.159 Sale Price 15.9% Cap Rate

7 H. Property Management / Investment (ROI) You made a deal with owner, that if you sold listing you would reduce your commission from 10% to 8% This is called a variable commission rate, (DRC) and must be disclosed in listing What is gross company dollar?

7B. Valuation / Market Sale Price and Yields $400,000 : Results : Base Rate 5,000,000 X 0.08

: : X You want to earn $50,000 selling real estate Average sales price is $150,000 Average gross commission is 3% Your split with broker is 80% How many transactions must you complete? : Results : Base Rate X

: : X $50,000 Income $150,000 X 0.03 X 0.8 $3,600 13.8 sales Results Base Rate $150,000 X 0.03 X 0.8 $3,600 X 13.8 sales

: : X What is the sales price if your commission was $12,258 at 2.5% Results : Base Rate X

12,258 : Results : Base Rate X 490,320 0.025 What would the commission be at 3%

14,710 : Results : Base Rate X 490,320 0.03

After two years, a loan of 27,500 was repaid including 5,000 in interest What was the interest rate? : Results : Base Rate X

After two years, a loan of 27,500 was repaid which included 5,000 in interest What was the interest rate? 5,000 : Results : Base Rate X 27,500 – 5,000 = 22,500 0.22 / 2 = 11% loan

12,345 is 94% of what number? : Results : Base Rate X

: : X 12,345 is 94% of what number? 12,345 Results Base Rate 13,133 0.94

98,765 is what % of 12,345,678? : Results : Base Rate X

: : X 98,765 is what % of 12,345,678? 98,765 Results Base Rate 0.008

: : X An apartment building produces a 15% ROI, which is $32,000 What did investor pay for apartments : Results : Base Rate X

: : X A group of apartments produces a 15% ROI, which is $32,000 What did the investor pay for the apartments 32,000 : Results : Base Rate X 213,333 0.015

: Results : Base Rate X

: Results : Base Rate X

: Results : Base Rate X

: Results : Base Rate X

: Results : Base Rate X

: Results : Base Rate X

Calculator to compute monthly payment 7. E Amortization Calculator to compute monthly payment 4th 1st 2nd 3rd Key N I/Y PV PMT # of Months Interest / Year Present Value Loan Enter 360 12 100000 CPT 1029

7. E Amortization What is loan balance after 2nd Payment? Beginning Balance 360 months @ 12% 100,000.00 X 0.12 / 12 months = 1,000.00 Payment 1,029.00 1st Month’s Interest 1,000.00 Apply to Principal 29.00 Loan Balance after 1st Payment 99,971.00 = 999.67 2nd Month’s Interest 999.67 29.33 Loan Balance after 2nd Payment 99,941.67 Total Payments 360 X 1029 = 370,440 – 100,000 loan = 270,440 Interest Paid

: 7. G Prepayment Penalty : X Prepayment penalty works like points Prepayment penalty is based on loan amount when paying off loan before a certain time, usually about 7 years 3,000 : Results : Base Rate X 100,000 0.03 Prepayment penalties are not allowed on FHA, VA or Conforming Loans

: 7. G Prepayment Penalty : X Test question will be something like: Prepayment penalty is $4,321 on a $216,050 loan Penalty is how many points? : Results : Base Rate X Prepayment Penalties are not allowed on FHA, VA or Conforming Loans

: 7. G Prepayment Penalty : X Test question will be something like: Prepayment penalty is $4,321 on a $216,050 loan Penalty is how many points? 4,321 : Results : Base Rate X 216,050 ???? Prepayment Penalties are not allowed on FHA, VA or Conforming Loans

: 7. G Prepayment Penalty : X Test question will be something like: The prepayment penalty is $4,321 on a $216,050 loan The penalty is how many points? 4,321 : Results : Base Rate X 216,050 0.02 Prepayment Penalties are not allowed on FHA, VA or Conforming Loans

: Results : Base Rate X

Helpful T Formula video https://www.youtube.com/watch?v=zVkQOxNky00

T Formula video https://www.youtube.com/watch?v=4V5OYHShtxE

Prorations and T Formula video https://www.youtube.com/watch?v=H9ybNWKsKQw

Points and T Formula video https://www.youtube.com/watch?v=vFeajW7aC6o

Appraisal video https://www.youtube.com/watch?v=VidsXGMYVF4

Ma & Pa Kettle do math https://www.youtube.com/watch?v=t8XMeocLflc

Funny Signs https://www.youtube.com/watch?v=KPAqVgJJBKA

7 H. Property Management / Investment (ROI)

: : Small # on top 10 Piece of Pie Results / Base = Rate Results / Rate = Base Results : : Base Whole Pie X Rate Size of Piece % of Pie Expressed as Decimal 100 10% = 0.10 Big # on bottom Base X Rate = Results