Congratulations! Your family has found the home of their dreams, the earnest money deposit has been paid, you and the sellers have signed the contract, and the attorneys are now working on closing.
The next time you speak with your attorney, ask him about prorations. Prorations are expenses that have been paid by the seller but now need to be divided between the buyer, as the new property owner, and the seller. Here are a few examples of items that often come up.
Real property taxes.
If the seller has prepaid his real property tax for the year the purchase is occurring, the buyer should be reimbursing the seller for a portion of the tax the seller has prepaid. This is usually calculated by dividing the year’s $ tax amount by 365 (the number of days in the year), and coming up with a daily dollar amount. The buyer then would usually owe the seller the portion of the tax for the period from the day the property closed and he takes possession, to the year end.
Often condominium associations bill quarterly in advance for the common maintenance charges. If the seller has prepaid his fees, but the transfer of the property occurs before the end of the quarterly billing period, the buyer would normally owe the seller.
This often comes up with condominium sales as the insurance is usually prepaid on condominium exteriors and assessed separately from the common area maintenance charges. Sellers often ask for the buyers to refund them on insurance prepaid for a period of time after the buyer assumes ownership of the property. This usually does not occur in home ownership, as the seller cancels their policy and the home owner procures their own policy.
Prorated charges are usually determined by identifying a yearly charge for the item to be prorated and then dividing by 12 to determine a monthly charge for the item. Further, because closings often occur at random times, a daily charge can sometimes need to be identified for an item. This is done by taking the monthly charge and dividing it by the number of days in the month.
To ensure there are no surprises, speak to your attorney about any possible items that will be prorated and appear on your closing statement.