 IT'S IN THE DOCSby Mark Jones - NARS
Pro-what Rational? Sounds like a
gimmick, I know, but prorations are an important aspect to assess
when determining how much money it will take to set up an Equity
Holding PAC or NEHTrust. Most are familiar with the term proration
and even what it means to prorate a payment. In short, a prorated
amount occurs when you have use of a resource for less time than the
normal time-unit-price (TUP) and is calculated as a fraction of the
normal TUP. Yes, I did just invent that TLA (Three Letter Acronym),
but don't fret. Let's look at an example to illuminate:
You
decide to jump on the smart-phone bandwagon with your first PIM
(Personal Information Management) integrated and Internet enabled
phone. After all, not only can it keep track of your schedule,
contacts, and to-do list, it can also help you navigate with Google
Maps using real-time, location specific traffic information at your
finger tips. Sounds cool right? It is. Of course all that is
irrelevant. What's relevant is: since you're starting a new contract,
you have your first month's bill prorated. The shiny new bill for
that shiny new phone is due on the 1st of the month, but you're
starting your service on the 21st and you certainly don't want to pay
for 20 days of service that you did not receive. No problem, the
extremely sharp, highly educated sales person at your local mall
kiosk says they'll prorate your first month so that you only pay for
10 days. Thus your bill has been prorated and you pay approximately
1/3 of the normal time-unit-price for your first month.
This
is what most people mean by a proration or prorated amount. Here at
NARS, proration takes on a slightly different meaning. The Trustee
needs to account for all the bills involved in an Equity Holding
Trust. If taxes and insurance are not impounded (escrowed) with the
lender, the Trustee will escrow the funds in the monthly payment.
Calculating what is due each month on an annual bill is a simple
matter of taking the payment and dividing it by twelve. Our new Trust
Origination Engine (TOE) system not only adds this amount into the
monthly payment obligation, it also calculates the prorated amount
for the payments that the Trustee will not have collect monthly.
Time for another clarity giving
example:
We're setting up a new PACTrust where the insurance
payment is due annually on May 1 (May Day, Insurance ... get it?)
and is not included in the monthly loan payment. It's
currently the beginning of June and the Trustee will begin regular
bill collection and disbursement with the July payment. How many
months will the Trustee be short next year when the Insurance payment
is due? Two months (the number of months between May and July).
Here's another way to look at it: If the Trustee begins collecting
1/12th of the Insurance premium each month beginning with July, how
many months will the Trustee have collected before May? Ten months,
leaving the Trustee two months short of the annual payment.
|
|
Jan
|
Feb
|
Mar
|
Apr
|
May
|
Jun
|
Jul
|
Aug
|
Sep
|
Oct
|
Nov
|
Dec
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
- Collected payments
|
|
|
- Uncollected payments
|
This is what we mean by
"proration" and is important because it has caused some
sticker shock and questions when looking at how much money it takes
to start a PAC or NEHTrust. While it isn't essential that you know
how to do the math, it is important to be aware of this "hidden"
cost so that you can factor in the proration startup costs into your
closing estimates. Unexpected costs can be a source of major problems
and even cause a transaction to fail. There's nothing quite like
suddenly realizing it's going to take an additional $3,000 in
property tax and insurance prorations to get the Trust
started.
Congratulations! Now you know how and why we include
prorated amounts in the setup costs of Equity Holding Trusts but if
the lender is collecting taxes and insurance as part of the monthly
payment, you don't need to know any of this. :)
| |
Newsletter Contents
Upcoming Events
LA PACRats w/ Bill Gatten:
Culver City, CA,
Wed, April 30th from 6:30pm - 9:00pm
Location Info: AMVETS - 10858 Culver Blvd. - Culver City, CA 90230
2.5 Day Workshop
Ontario, CA
Friday, May 2nd thru Sunday, May 4th
Location Info: Holiday Inn Ontario Airport, 2155 East Convention Center Way, Ontario, CA 91764
Hotel Phone: 909.212.8000
PENSCO: IRA Investments - NARS presentation by Pete Mendenhall
Thursday, May 29th thru Friday, May 30th
Location: Dallas, TX
Hyatt Regency DFW, International Parkway, Dallas, TX
Very special limited time Early Bird discount for NARS community members!!!!
The Cruise! 2009
Departing February 8 -15, 2009
Location: The Pacific! (with ports of call in Puerto Vallarta, Mazatlan, and Cabo San Lucas)
Member Advertisement
Houses, North Philadelphia
Investors, Contractors, Rehabbers Gambling is coming to Philadelphia, property values rising. Opportunities Available. Get in ?NOW !
wimmerdh@juno.com
Carribean Villa Investment Vacation
Share ownership in new Land Trust holding brand new Villa in Red Frog Beach Club, Panama--next to rain forest & outside of the hurricane zone. Select your own vacation time, share in the rental profits, either or both.
wimmerdh@juno.com
Private Lenders Sought by Probate Attorney
I'm in probate court almost everyday. I need private lenders for real estate with 70-80% LTV.
whayes1310@sbcglobal.net
Secured and Good return on investment
I need private money to fund properties that I purchase. High return on investment and secured.From $10k and above. Call Matt at 818 923 7723 or email at webyyrhouse@hotmail.com for details.
webyyrhouse@hotmail.com
So. Cal. Real Estate Appraiser
I have over 20 years experience appraising residential properties. State Certified Residential Appraiser in California. If you need to know the real value in this declining market you may want to order an appraisal. Call me at 951-850-2171. Bill Dobyns
wdobyns2003@yahoo.com
|
