|🗓️ What Does Proration Mean in Real Estate? 🗓️
Proration is the divvying up of property expenses (like taxes) between the buyer and seller. It’s a way for the seller to pay for these expenses only for as long as they have owned the property.
Prorated costs, like property taxes and HOA fees, are usually due at closing.
How are property taxes transferred in a home sale? Who pays HOA dues at closing? How are those fees calculated? This post will explain all this and more.
There are a number of transferable fees due at closing, like property taxes and HOA fees, that need to be calculated. Proration is the process of dividing various property expenses between the buyer and seller in a way that allows each party to only pay for the days he or she owns the property.
Expenses prorated at closing can include:
- 💲 Property taxes
- ⚡ Homeowner’s insurance
- 🏡 HOA dues
- 💵 Mortgage interest
While real estate prorations are a normal closing cost, they can add up fast. If you’re selling a house and are looking to save money on closing costs, we recommend our friends at Clever Real Estate — a free service that matches you with hand-picked, pre-vetted local agents from top-rated brokerages such as Keller Williams, RE/MAX, and Coldwell Banker.
With 1,600+ reviews on Trustpilot, Clever has a 4.9 out of 5 rating and has helped thousands of families save. Home sellers who find an agent through Clever pay just 1.5% in listing fees and save an average of $7,000. And home buyers can get cash back after closing in most states!
Paying Real Estate Proration Costs in Advance vs. in Arrears
Prorated or not, some real estate expenses are prepaid in advance and some are paid in arrears (meaning “after the fact”). Here are a couple of examples:
|⏩ Paying in advance
|You’re pre-paying for coverage that will happen. If you pay your homeowner’s insurance on April 30, you’re paying for coverage that will happen in May. If you pay yearly HOA dues on Dec 31, you’re paying for coverage that will happen the following year.
|⏪ Paying in arrears
|You’re paying for coverage that has already happened. If you pay your mortgage on April 30, you’re paying the principal and interest that has already accrued in April.
Prorations at Closing
Since escrow closings don’t always happen at the end of a month, expenses often need to be prorated for partial months or partial years.
For example, if a sale closes on April 10th, the seller will pay for property expenses — like property taxes and HOA fees — from January 1 through April 9. Then the buyer would pick up any expenses beginning April 10 until the end of the year.
Rental income from a tenant may also be divided between the seller and buyer at closing (i.e. prorated), if the closing occurred sometime other than the end of the month.
The escrow agent typically figures out what expenses are paid in advance vs. in arrears, and separates charges and any tenant income accordingly, between the buyer and seller.
Balancing Real Estate Prorations: Who Pays What
If a seller has already prepaid her property taxes through some date after the close of escrow, they may expect a credit at closing for a prorated portion of that prepaid amount. In this case, the buyer would be charged the prorated amount at closing, which would be an additional closing cost for the buyer.
By contrast, if the seller’s tax payment for the period was not yet due, then she would be charged the appropriate (prorated) tax amount at closing, and the buyer would pay the remainder of the tax bill for that tax period.
Don’t worry about doing all the math — your buyer’s mortgage broker and your title company will figure it out for you. The title company will send out a breakdown of closing costs before closing, usually within 10 days. Lenders are legally required to send all closing costs within three business days of closing.
Real estate prorations are probably the easiest part closing because someone else is figuring it out for you. If you’re selling or buying a house, you should have a good agent by your side, doing most of the legwork. But we don’t recommend sellers pay the typical 3% fee most seller’s agents charge.
That’s why we’ve partnered with Clever Real Estate. Clever is a nationwide brokerage that offers a free agent-matching service that can pair you with top-performing local agents. Clever hand-picks agents from companies like Coldwell Banker and RE/MAX, pre-negotiates low rates, and passes the savings on to you.
With Clever, sellers can sell their house for a low 1.5% fee, while buyers in 41 states can get cash back at closing!
Clever is free to use and there’s no obligation to continue if you can’t find an agent you love. We think you will — but just in case, Clever can match you with multiple agents to pick from.
👋 Next steps: Talk to an expert!