Hey everyone! It’s Austin Solomon with The Solomon Group coming to you live with this week’s episode of The Real, Wausau’s Real Estate Show.
Today we’re talking about prorations. So prorations… the definition is to distribute or to allocate something. So when it comes to real estate, it’s not a fun topic, but it gets mixed up so much. It’s a new topic for a lot of people, so I thought I’d debunk what it is and how it affects the real estate space.
So when you own a home, you have a lot of recurring bills like property taxes, utilities, maybe you have an LP tank if you’re own in the country, maybe you have fuel oil, if you have a condo, there is an HOA fee, or if it’s a rental there is rent & security deposits. There’s all these things that need to be divvied up and accounted for when you close on a property.
How do all of things get squared away at closing? Well it can be a little tricky, especially when you have all those different billing cycles for each of those things. So, for example, a city water & sewer bill typically comes out every quarter, where taxes are paid in arrears which means 2018’s taxes are due in 2019. And then you have LP and those prices are changing on the daily, so that adds another variable.
But that’s where the title company comes in to prorate or distribute the proper amount of dollars to each category and then the buyer & seller. So effectively, the buyer is starting fresh when they close on a home.
So what do I mean by this, so let’s say that we’re going to use June 30th as a closing date, so that’s halfway through the year. And if you have taxes that are $1,200 a year. So basically the seller would be responsible for the first half of the year’s taxes while they own the property, so 6 months of taxes, in our case, $600.
So the seller would credit the buyer $600 and then the buyer would be responsible for the full amount of the taxes when it comes due at the end of the year. So, the whole goal of prorations is that when the seller signs and closes on the house, the seller can walk away and not have to worry about any more bills or taxes or utilities or things that may come up down the line would be the buyer’s responsibility.
So let’s talk about utilities! So, June 30th, that’s at the end of the month, so that might make things a little easier for you, so if that bill doesn’t come out in time, for example your water or sewer bill, they use the next best thing. So that might be a previous bill. If the bill did come out what they’d do is say, you’re going to credit the buyer X number of days, and in our case that may be 80 – 90 days of water & sewer based on the previous bill and then when that new bill comes out the buyer is going to be responsible for that.
Let’s say it’s a June 1st closing, right. There would be two months of utilities that would be due and they would use that previous bill. So, ok we have two months of $100 bill and it comes out every 3 months, so about $66 that you would give the buyer at closing and then the next month when that bill actually comes due, the buyer is responsible for it.
Then there are things that are prorated on the monthly, could be a rent amount, that’s pretty easy. So if you close on the 15th day of the month and there is a rent payment that’s $1,000 per month and you have to prorate that rent. The buyer, or actually the seller would hold on to the rent if the seller were to have the rent, that’d be half of that or $500 and then the other half would go to the buyer.
So, that’s what prorations are! And then there is LP and fuel oil and that involves at the time of closing, how much fuel is left in the tank, and the buyer would reimburse the seller for the amount of fuel that’s in the tank. So for example, let’s say there’s a 100 gallon LP tank and $100. The buyers would give the sellers a check for $100 for the fuel that’s left in the tank, done.
Now, for WPS, or Wisconsin Public Service, or your electric or gas, that’s a little bit different. WPS requires the buyer and the seller to call to switch that over and there is actually no proration involved there. What they do is they will… if it’s closing on X day, they will do a meter read and send out two bills and start that fresh for the buyer. That works out pretty nice too.
That’s what prorations are when you’re selling a house and when you’re buying. If you understand this, it may just make things easier come closing day and transferring everything over into your names.
Thanks for listening to this week’s episode of The Real and we’ll catch you guys on next week’s show.
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Austin Solomon | The Solomon Group – Coldwell Banker Action – (715) 212-4693