What Are Prorations In Real Estate

What Are Prorations In Real Estate

What is Meant by a Proration?

The term proration is used to describe when a corporate company, during a merger or an acquisition, splits its assets and money in accordance with the shareholder's preferences. This is more often than not a corporate term used by big businesses to align with their interests. It can also be seen as a give and take.

When a company is being acquired, the acquiring business can offer cash, equity, or both and it is up to the shareholders of the company in question to choose their preference. In some cases, the cash or equity being offered does not suit the shareholders’ needs, and thus, the decision to prorate the stock left is reached. The organization gives an extent of both money and assets for each proposition offered so everybody gets their reasonable portion of the arrangement.

Interpreting Proration In Real Estate

In a nutshell, real estate proration means divvying up the taxes due on the property between the buyer and the seller. If the seller still has ownership of their property, they can opt-in to pay for these taxes. It is seen as a way to close up a deal before selling off the property. Transferable fees that are due may be split between the two parties as long as both or either one of them owns the real estate. This entire business encapsulates a number of expenses that can be prorated as per need:

  • Homeowner’s Insurance
  • Mortgage
  • Property Tax
  • HOA fees

How To Calculate Proration?

You could run into sums of money for different reasons, or you could decide to make a proposal of an allocated installment to a business. Having knowledge of the “prorated bill” checks out in all kinds of dealings. How to ascertain allocated offers or different sums will assist you with figuring out ahead of time precisely the exact thing you'll pay.

Read: 14 First-Time Home Buyer Mistakes To Avoid

To start off, determine how much time your contract covers, how much each time unit (such as a month) costs, and then perform a simple multiplication. Suppose you wish to join the trade association for your profession. Annual member dues are $180. That equals $15 each month. The membership fee for the following year is billed to all members on January 1.

Additionally, you may have submitted an application for membership and it gets accepted, however, it is early October. This implies you have three months remaining on your membership for the year. This year, you will pay $30 for a prorated membership. On January 31, you will be charged $180 for membership for the next year.

In some instances, the math is not so straightforward. Suppose you pay $200 for a 12-month VIP customer program at a restaurant. After seven months, you must relocate due to a new job. The restaurant offers to reimburse or prorate your membership for unused months. So, ​$200 / 12 =​ ​$16.67​. Multiply $16.67 by 5 to obtain a refund amount of $83.33.

A Bit About Property Tax Proration

Property Tax proration is the process by which the seller and the buyer divide up the tax bill for the property. Until the official title is officially transferred to the buyer, the seller is responsible for all property taxes. And similarly, after the closing date, the buyer is responsible for any property taxes. The computations for proration are usually simple and understandable, but not in the case of property taxes.

The fiscal year, rather than the calendar year, is used to calculate property taxes, for example. There's also the fact that the dates on which property taxes are due vary from one state to the next. As a result, before doing any kind of math, individuals should learn the specifics of how their state or county collects taxes.

Furthermore, there is an additional layer of settlement statements that need to be taken care of before moving on with any finalization of property. These statements are a lengthy list of itemization sums between the two concerned parties. An official is also required to mediate these talks and usually comes from a law firm as a paralegal, attorney, or legal secretary with vast knowledge on how to deal with required calculations and what way the proceedings shall go. 

Proration of property tax is a multi-step process. Taxes for the current property year will first be determined by the legal representative, or a copy of the tax bill will be provided by the seller. Next, the person will need to figure out how many days of the year the seller actually had title to the property.

For the proportion for the year the seller was responsible for taxes, that exact figure will have to be divided by 365 which is the number of days in a year. Finally, the amount of property tax that the seller must pay to the buyer is calculated by multiplying the percentage by the total property tax bill. To know how much money the buyer has to bring to closing to cover property taxes, one could deduct the amount the seller will be responsible for paying from the total property tax payment.

What Is A Probation Agreement?

Understanding proration and its various workings are crucial to understanding the real estate world. Handing over/taking over assets, whether they are property or something considerably smaller may revolve around proration agreements and therefore it is imperative to grasp its concept and workings.

It is always good practice to hire a lawyer or someone with good law awareness to safeguard against fraud and ensure a smooth transition from the seller to the buyer. With property tax values quite turbulent in the present economy, there is no telling when prices might dip or rise. Costs of proration might add up to a buyer’s dismay. Thus, acting smartly and swiftly with the guidance of an agent (a broker or a lawyer) is favorable and may yield better results than acting on one’s own accord.