California Real Estate Practice Exam

An office building purchased for $200,000 with 25% down and 75% financed had $1,500 per month payments with 12% annual interest. Ten years later, the property sold for $400,000. What is the owner's equity at the sale (includes original investment)?

1. $100,000

2. $150,000

3. $200,000

4. $250,000

The correct answer is: $100,000

To determine the owner's equity at the time of sale, it's essential to understand how equity is calculated in real estate. Equity can be defined as the difference between the market value of the property and the amount owed on the mortgage. Initially, the office building was purchased for $200,000 with 25% down. This means the down payment was $50,000 (25% of $200,000). Therefore, the financed amount, or mortgage, was $150,000 (75% of $200,000). Over ten years, the owner has made monthly payments of $1,500. To find the total payments made over ten years, multiply $1,500 by 120 months (10 years). This results in $180,000 total payments. With interest at 12% per annum, the mortgage payments consist of both principal and interest. By the end of ten years, not the entire mortgage balance will have been paid off. However, the critical step is evaluating the final sale price of the property. It sold for $400,000. To calculate the equity, it is necessary to determine the remaining balance on the mortgage after ten years. While specific calculations may vary based on amortization schedules, a rough estimate can provide