Defining Proration in Real Estate

Proration in real estate ensures a fair and accurate division of various expenses between the buyer and seller based on the duration of ownership. Whether it’s property taxes, HOA fees, or utility bills, these costs are prorated to reflect the time each party owned the property. Understanding proration helps both buyers and sellers navigate financial responsibilities during property transactions.

Instead of one party bearing the entire cost, proration allocates expenses in a way that is equitable. For example, if a seller has paid annual property taxes in advance, they are entitled to a credit for the period after the sale. Conversely, if taxes or any fees are due at closing, the buyer will cover their share from the purchase date forward. This system ensures a seamless transition of financial obligations.

Effective proration requires precise calculation and agreement on the amount owed by each party. It is a fundamental aspect of the closing process, as it avoids disputes and promotes transparency. By proration, the financial responsibilities that come with property ownership are clearly defined and fairly distributed, benefiting both buyers and sellers.

How a Loan Assumption Closing Involving Proration is Handled

When a buyer assumes a mortgage, they take over the seller’s existing loan. This process involves proration to ensure that expenses are fairly divided.

Title Company Role: The title company calculates prorated amounts. They divide costs like property taxes, interest, and homeowner association fees based on ownership days.

Cost Type	Responsibility Day of Closing	Responsibility Before Closing
Property Taxes	Buyer	Seller
Mortgage Interest	Buyer	Seller
HOA Fees	Buyer	Seller

Escrow Account: The buyer may purchase the seller’s escrow account, which includes prepaid expenses. The seller gets credited for unused funds.

Utilities and Insurance: Utility bills are typically prorated, with the seller covering the period before closing. The seller might cancel their insurance policy post-closing and receive a refund for the unearned premium.

Security Deposits: If tenants are involved, security deposits are usually transferred to the buyer in full.

For example, if the property is sold on July 15th, the seller pays for costs up to July 14th, and the buyer covers from July 15th onwards. These details ensure a balanced distribution of costs and interest, providing fairness in the transaction.