What every estate agent should know in respect of Learning is the process whereby knowledge is created through the transformation of experience (Kolb 1984:38) Kolb, D 1984. Experiential Learning.
Kindly download the 10B11 calculator A. on your smartphone or use the handheld HP 10Bii Financial Calculator B. for this CPD intervention A. B.
NB: The yellow button with arrow showing down (on Smartphone) activates the yellow function on each button. 1. Set display to 2 decimals: DISP 2 2. Set payments to END: Beg/End
Module 1: Basic Arithmetic Skills The Repo Rate Interest Rates in Theory Interest rate in Practice Calculating Percentages Module 2: Utilising the Financial Calculator The Time Value of Money Amortisation of Mortgage Loans Module 3: Some Useful Mathematical Concepts Depreciation Pro-rating Floor areas & Measurement Module 4: Closing Statements Estimation of Closing Statements Costs to the Purchaser Costs to the Seller
Module 1 1.1 The Repo Rate its meaning and the SARB 1.2 Interest Rates how they are set and why they fluctuate 1.2.1 Interest Rate Conversions 1.2.2 Practical Examples re Nominal and Effective Annual Interest rates 1.3 Interest rates in Practice 1.3.1 Interest Rate Conversions 1.3.2 Practical Examples of Nominal & Effective Rates 1.3.3 Practical Examples: commission & VAT 1.4 How to Calculate percentages
The repurchase or repo rate is the interest rate at which the Bank lends money to private banks. The SARB acts as banker for private banks. Banks experience a cash shortfall or a need for liquidity on a daily basis and their lender of last resort is the SARB. The repo system of borrowing and lending involves the temporary sale of a financial asset by the borrower (bank) in exchange for the needed cash from the lender (the SARB). The repo rate is determined by the SARB at each meeting of its Monetary Policy Committee (MPC). It is expressed as a rate per annum.
The repo rate serves as a benchmark for the level of short-term interest rates. For example, if the repo rate increases, banks have to pay more for repo funds. To maintain their existing profit margins, banks raise the interest rates at which they take deposits from and lend money to their customers. This causes a general rise in interest rates or the cost of holding money.
1.3.1 Interest Rate Conversions If R1000 is invested at the stated annual rate of 8%, compounded monthly, the investment will accrue to R1 083 at the end of one year. The interest actually earned in one year on the original investment of R1000 is R83. This represents an annual yield of 8.3% and not 8%. Consequently, it is necessary to distinguish between the stated annual interest rate and the actual annual interest rate. When interest is compounded more frequently than once a year, the stated annual interest is referred to as the NOMINAL ANNUAL INTEREST RATE. The interest actually earned annually by each unit of the investment is known as the EFFECTIVE ANNUAL INTEREST RATE.
You are considering opening a savings account at one of three banks. BANK X: BANK Y: BANK Z: 7.5% annual interest, compounded quarterly 7.85% annual interest, compounded monthly 7.8% annual interest, compounded daily Which bank has the most favourable interest rate? X: 4 P/YR Y: 12 P/YR Z: 365 P/YR 7.5 NOM% 7.85 NOM% 7.8 NOM% EFF EFF EFF 7.71% 8.14% 8.11 %
1.4.1 When calculating the percentage of a number: e.g. 10% of 325 325 x 10% = 32.5 (325 x 10 100) 1.4.2 When calculating a percentage included in an amount: e.g. 325 includes an amount representing 10% of 325. 325 x 10 110 = 29.55 1.4.3 Practical Examples: commission & VAT e.g. The selling price of a property is R1.2m which includes commission of 5.5%. Calculate the amount of commission: 1 200 000 x 5.5 105.5 = R62 559.24 e.g. The selling price of an apartment is R900 000 VAT inclusive. Calculate the price excluding VAT: 900 000 (900 000 x 14 114) = 900 000 110 526.32 (VAT) = R789 473.68
Module 2 2.1 The Time Value of Money 2.1.1 Definition and how it effects Real Estate 2.1.2 Practical Example - Savings Calculation 2.1.3 Practical Example - Loan Calculation 2.2 Amortisation of Mortgage Loans 2.2.1 Definition of Amortisation 2.2.2 Practical Example Calculating capital & interest after 7 years
2.1.1 Definition and how it effects Real Estate The time value of money (TVM) is the concept that money available at the present time is worth more, i.e. has a higher value than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. In real estate this obviously means that it may be better to sell your property sooner at a lower price than over a longer period of time at a higher price.
1. You have R20 000 to invest for 5 years. Interest is currently 9,5% and is to be calculated monthly. What is the Future Value of the investment? 12 P/YR 20 000 ± PV 9,5 I/YR 5 X P/YR FV R 32 100 2. You are going to invest R1 000 every quarter for 5 years and interest of 9,5% is calculated quarterly. What is the FV of the investment? 4 P/YR 1000 ± PMT 9,5 I/YR 5 XP/YR FV R 25 225
The maximum monthly mortgage payment you can afford is R7 000. You have R100 000 for a deposit, and annual interest rates are 10,5%. If you obtain a 20 year mortgage loan, what is the maximum amount you can afford to buy for? 12 P/YR 7 000 ±PMT 20 XP/YR 10,5 I/YR PV R701 136 + 100 000 = R 801 136
2.2.1 Definition of Amortisation Amortisation is a routine decrease in value of an intangible asset, or the process of paying off a debt over time through regular payments. 2.2.2 Practical Example: amortisation of a mortgage loan You purchase a property utilising a mortgage loan of R1million to be amortised over 20 years at 10.5% interest. You foresee selling this property after 7 years. 1. What is the monthly payment due? 2. What will the balance of the loan be after 7 years? 3. How much capital has been paid off over 7 years? 4. How much has been paid in interest over 7 years?
1.Monthly payments: 12 P/YR 1 000 000 PV 10.5 I/YR 20 xp/yr PMT - R9 983.80 3. Capital paid in 7 years: Capital = 1 000 000 847 880 = R152 120 2. Balance: 1 000 000 PV 9 983.80 ± PMT 10.5 I/YR 7 xp/yr FV R847 880 4. Interest paid in 7 years (84months): Interest = (84 x 9 983.80) 152 120 = 838 340 152 120 = R686 220
Module 3 3.1 Depreciation 3.1.1 Definition 3.1.2 Practical Application 3.2 Pro-rating 3.2.1 Definition 3.2.2 Practical Application 3.3 Floor areas & Measurement 3.3.1 Formulas 3.3.2 Practical Applications
3.1.1 Definition In economics, depreciation is the gradual decrease in the economic value of the capital stock of a firm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question. 3.1.2 Practical Application In property economics depreciation can be assumed to be the monetary depreciation of a property through physical depreciation (condition), obsolescence (position changes due to new roads) or changes in the demand for the property (over supply in the area) in question.
3.2.1 Definition To pro-rate means to calculate a cost, payment or price according to the amount of something that has been used in relation to the fixed rate for a larger amount 3.2.2 Practical Application A rental amount will be pro-rated if occupancy does not begin on the first day of the month and the agreed rental is a monthly amount payable on the first day of each month, i.e. monthly rental is R3 000 and tenant/purchaser occupies from the 10th of the first month. The pro rata rental of R2 000 is payable in that first month, based on a daily rate of R100 per day and calculated for 20 days.
Floor area (FA) is a building, architecture and real estate term referring to the amount of area (measured in square metres) taken up by a building or part of it. Floor areas are measured to the inside of the exterior walls; except in Sectional Title where the floor area of each section is measured to the median of the outside walls. The total floor space of of a ST section is used to determine the size of the unit s Participation Quota (PQ) which is expressed as a percentage to 4 decimal places of the total floor area of all the sections. The PQ in turn, determines the unit s undivided share in the common property.
It is simple to calculate square metres when measuring rectangular shaped rooms. Just multiply the length by the breadth (LxB) in metres and you have the answer. When measuring more complex shapes it is best to divide them into separate rectangles and then add them together to get a total area measurement. Should a room have a circular shape, the following formula is used: A = π r 2 π is a mathematical constant, the ratio of a circle's circumference to its diameter, commonly approximated as 3.14. The radius is half the diameter of a circle The formula for determining the area of a circular shape is therefore: Area = 3.14 x r 2
If a room has a slanted wall or walls it will be necessary to calculate the area of a triangle To find the area of a triangle, multiply the base by the height, and then divide by 2: A = (B x H) 2 5m = 10 2 = 5m 2 2m
7m 3.6m 3 1 2 6.1m 4.8m 1. A = L x B = 7 x (6.1 3.6) = 7 x 2.5 = 17.5 sqm 2. A = L x B = 4.8 x 3.6 = 17.28 sqm 3. A = (B x H) 2 = [(7 4.8) x 3.6] 2 = (2.2 x 3.6) 2 = 7.92 2 = 3.96 sqm Total of the three areas: 17.5 + 17.28 + 3.96 = 38.74 sqm
Module 4 4.1 Estimation of Closing Statements Definition and Contents 4.2 Costs to the Purchaser 4.2.1 Checklist 4.2.2 Practical Example 4.3 Costs to the Seller Checklist
Definition and Contents The closing statement sets out the exact amount of money needed to close a real estate transaction and effect the transfer of title and ownership from the seller to the purchaser. It includes all the costs involved in the sale and is prepared by the transferring attorney (conveyancer). These costs are payable by the purchaser and seller to the conveyancer who disburses the amounts to the appropriate accounts. (See 4.2.2 and 4.3.2) In the event that the purchaser makes use of a mortgage loan to finance the transaction, a closing statement from the conveyancer overseeing the bond registration will contain the following: bond registration fee, conveyancer s fee, post & petties, deeds office search fee, deeds office registry fee, electronic facilitation costs and personal E-vault costs
4.2.1 Checklist for Purchaser Transfer Duty Rates Clearance Certificate Levies or HOA clearance certificate (if applicable) Conveyancer s transfer fee Deeds office fee Deeds office search Posts & Petties Electronic instruction fee Electronic Rates fee Municipal provision for Rates and Taxes (if applicable) Occupational Rental (if applicable)
STATEMENT OF ACCOUNT TRANSFER PROPERTY: SECTIONAL TITLE DESCRIPTION DEBIT CREDIT To purchase price 1 195 000,00 By proceeds of bond 1 075 500,00 To transfer duty 13 350,00 To rates clearance certificate fee 74,60 To levy clearance certificate fee 800,00 To transfer fees 17 909,40 To Deeds Office fee 950,00 To Deeds Office search 171,00 To postages and petties 969,00 To Electronic Instruction Fee 228,00 To Electronic Rates Fee 456,00 By Amount received on 20/1/2016 119 500,00 By Amount received on 24/2/2016 33 517,06 To Body Corporate - levy for April 2016 1 456,00 By Interest received on investment 1 404,47 To Amount paid to PURCHASER 348,47 By amount due by you (incl. VAT) R0,00
4.3.1 Checklist Bond cancellation (if applicable) Estate Agent s commission Bond cancellation costs Pro rata municipal rates Compliance Certificates (electrical, gas, plumbing (in certain municipal areas) Rates and Taxes Clearance Certificate (R&T must be paid 4-5 months in advance before registration can take place) OR Body Corporate pro rata levies until date of transfer (if applicable) Capital Gains Tax unless exempted if primary residence is being sold by a natural person and gain/loss is R2m or less
STATEMENT OF ACCOUNT TRANSFER PROPERTY DESCRIPTION DEBIT CREDIT By purchase price 1 195 000,00 To amount required to cancel bond 324 500,80 To agent's commission 68 115,00 To bond cancellation costs 3 117,00 To Pro rata municipal rates 6 209,16 By Amount received on 27/1/2016 6 209,16 To Electrical, Beetle & Plumbing certificates 3 506,80 To Body Corporate - pro rata levies until day of registration 1 200,00 To Amount paid to SELLER 794 560,40 By amount due by you (incl. VAT) R0,00 *Supplied by DvH Attorneys, with thanks
Select only the correct statements: (I have marked them with an *) 1. The Repo rate is A. the rate at which SARS lends money to private banks B. the rate at which private banks lend money to borrowers C. the rate at which the SARB lends money to private banks* D. also known as the reported rate 2. If R10 000 is invested at the stated annual rate of 9%, compounded monthly, in five years the investment will accrue to: A. R15 656.81* B. R15 386.24 C. R10 381.31 D. R15 513.28
3. The selling price of a property is R1.15m which includes VAT. The amount of VAT payable is: A. R161 000 B. R141 228.07* C. R154 000 D. R135 087.72 4. A property is sold for R800 000. The price includes the estate agent s commission of 5.7% (VAT included). The amount of commission that the agent will earn after the VAT has been paid to SARS is: A. R45 600 B. R39 216 C. R38 095* D. R40 000
5. A purchaser has R50 000 as deposit on an apartment and can afford to repay a mortgage loan at R10 000 per month. The bank is offering her a mortgage loan at 9.8% per annum over a 20 year term with interest to be calculated monthly. What amount can the purchaser buy for? A. R1 050 631 B. R1 052 105 C. R1 102 105 D. R1 100 631* 6. A purchaser takes transfer of a property 3 months after the seller has paid rates and taxes of R36 000 for 12 months in advance. How much must the seller be reimbursed in total on a monthly pro rata basis? A. R27 000* B. R33 000 C. R36 000 D. R0
7. The floor area of a sectional title section is 76sqm. There are 10 units in the development. The total floor area of all the sections is 10 520 sqm. The Participation Quota of the section: A. 0.0072 B. C. 0.0722 C. 0.7224* D. None of the above 8. The diameter of a rondawel is 8m. What is its area? A. 25.12 sqm B. 50.24 sqm* C. 12.56 sqm D. None of the above
9. Select the correct statement: A. In economics, depreciation is the gradual decrease in the economic value of a property* B. The repo rate is determined by the SARB at each meeting of its Internal Policy Committee C. When interest is compounded more frequently than once a year, the stated annual interest is referred to as the effective interest rate. D. A core principle of finance holds that, provided money can earn interest, any amount of money is worth more the later it is received. 10. The seller of a property needs to make provision inter alia for the following cost: A. Transfer Duty B. Conveyancer s fee C. Clearance certificates costs* D. Bond registration fee
The End