In real estate transactions, real estate seller proration is when certain expenses are divided between the buyer and seller. Though technical, the term reflects the content of fairness and justice in real estate transactions. It’s not only the mere question of numbers and dates, but it also goes about the equitable distribution of responsibilities and benefits between the seller and the buyer.
This blog is a real guide to seller proration in real estate and consists of the following four parts: definition, expenses bound by proration, calculation of proration amounts, the author’s personal experience during the closing, as well as online notary services. Moreover, there is a possibility to meet online notaries for the remote execution of documents, and besides, they allow a hassle-free and efficient closing in the 21st century.
What is Real Estate Seller Proration?
Seller proration in real estate deals with financial adjustments that are critical during property selling. It generally ensures that the seller only pays for expenses until the transfer process.
For the lab purchase price, the seller of the land divides the costs by the closing date so as to arrive at the exact prorated costs. Costs on a pro-rata basis will enable the seller of the house to sell it during a certain period without having to deal with expenses of transfer as of the date of the transaction.
Hello, in addition to real estate, it has been formulated a rule of thumb is to notarize also all your title and escrow documents to anchor them in time and space.
Common Expenses Subject to Real Estate Seller Proration
Below are some of the aforementioned expenses that are prorated by the real estate seller and the details of each of them to you:
Property Taxes
One of the most vital elements that are cut subject to proration is property taxes. Because these taxes are paid in advance in most cases, it will seem that only the property seller is the one who is responsible for the part of the tax year he/she owned the property.
In fact, sellers that have forwarded taxes after the deal are the ones that get back the money as a kind of repayment of the taxes spent.
Homeowners Association (HOA) Fees
In case the property is a part of the homeowner’s association, the real estate seller will take over the payment of the HOA fees for the entire time of his/her ownership. Such fees are usually paid every month, every 3 months, or annually.
For the period when the landlord held the property, any extra HOA fees owed will be compensated or charged back.
Utility Bills
In some cases, utility bills for water, sewer, and sometimes garbage collection are billed in arrears. At that time, the seller will have to take care of these bills until the date of the formal disposal of the property.
The quantity is determined by the seller’s utilization up to the date of the transfer of ownership, which ensures that they only pay for the services that they have actually used.
Mortgage Interest
If the property seller has a mortgage on the property, mortgage interest is prorated. You are required as a real estate seller to pay interest till the day of closing the property. The seller decides on the sum, and interest remains to be a part of the costs for the forthcoming month, and it should be paid by the seller at the closing.
Additionally, it is important for the closing process to calculate budget numbers wisely and know how these charges work.
How to Calculate Real Estate Seller Proration
Calculating seller proration amounts can be confusing, but generally, the title company or escrow agent takes care of the job. The proration amount can be found by dividing the total expense by the number of days in the year.
The entire process for the above is as follows:
Identify the Expenses to be Prorated: Find out the expenses the real estate seller is expected to pay, which include property taxes, homeowners association fees, and utility bills. Decipher the ones that are applicable for the property sale.
Determine the Proration Period: This is the time period during which the seller is obligated to pay for the charges in regard to the sale of real estate. It is usually the interval from the date of the last payment to the date of the closing of the sale.
Calculate the Daily Rate for Each Expense: When it’s a leap year, divide the annual tax amount by 366 (or 365) to get the daily tax rate.
If it is a monthly HOA payment, divide the sum calling the HOA by the number of billing days of the period (monthly, quarterly, etc.) If it is a utility bill, you can see the latest bill to calculate a daily rate by dividing the total bill by the number of days in the billing cycle.
Multiply the Daily Rate by the Number of Days in the Proration Period: Find the number of days from the beginning of the proration period to the date of closing. Then, take each expense’s daily rate and multiply it by this number.
Adjust the Final Settlement Statement: The numbers that appear will show the figures that the sellers owe for the prorated expenses. These amounts are then entered on the last settlement statement. Thus, the seller is either credited or debited according to the figures.
It is commonly recommended that the service of a real estate professional or a closing agent be used for carrying out these calculations because they can be quite intricate, in particular with different types of billing periods and rates.
Examples
For instance, the concept of seller proration in real estate transactions can be exemplified through several real-life situations, each depicting how this process is instrumental in expense allocation equity. Here are some instances:
If the seller is the one who has paid the property tax in advance for the entire year, and the sale of the property takes place halfway through the year, the real estate seller is to get a credit at closing for the part of the year still remaining. This proration guarantees that the seller is paid back the part of the tax year they are not going to possess the property.
If the seller has paid the monthly HOA fees but the closing of the sale is in the middle of the month, they are going to get a credit for the days they no longer own the property. The first step to this proration is to divide the monthly fee by the number of days in the month and then multiply it by the number of days after the sale.
If the seller has paid for the whole month but the property is sold before it passes, they will receive a credit for the remaining days. This amount will be based on the daily cost of the utility usually, and it is the cost per day times the days the seller will not be in the property.
Conclusion
The understanding of seller proration is one of the key aspects that every real estate buyer and seller has to have in the event of real estate transactions. It enables both parties to settle their part of the expenses in accordance with the period they have owned the property.
Typical expenses requiring proration include property taxes, HOA payments, and utility bills. The seller prorates the expenses if the property was owned for more than a year.
Be sure to read our article on proration in real property contracts.
Prorated expenses will be altered on the final statement in the settlement by a title company or an escrow agent.
