Utilities are included in most HOA fees

Routes to finance

Many sales contracts used in real estate contain provisions for prorations between sellers and buyers. Before signing a sales contract you should read it to find out how the prorations will be handled because you may want to suggest a change in the wording of the prorations.

In most, but not all, cases, buyers will be charged for prorations. Fees appear as a debit on the buyer's closing statement and a credit on the seller's closing statement.

The credits increase the seller's net profit and reimburse the seller for the items the seller paid for for the period the seller does not own.

Mortgage rates

Unlike rent, which is paid in advance, mortgage interest is paid in arrears. For example, if you make a mortgage payment on January 1st, it pays the December interest.

On a new mortgage loan, lenders want to collect interest up to 30 days before the first mortgage payment. That is, if you close on November 15th, for example, your first mortgage payment will be due on January 1st. The January 1st mortgage payment pays the December interest.

As a borrower, you will be charged interest on your final declaration for 15 days, from November 15th to December 1st. To determine your interest in this scenario, here is the formula:

  • Loan amount x interest rate = annual interest.
  • Annual interest divided by 12 months = monthly interest.
  • Monthly interest divided by 30 days = daily interest.
  • Daily interest x 15 days (to pay interest by December 1st) = interest charge.

The same principle applies to sellers who are required to pay interest in connection with a loan disbursement according to the beneficiary's claim of the lender.

Property tax prorations

Every state organizes its real estate tax calendar year differently.

For example, in California, the calendar year is July 1st through June 30th. First, find out how your county collects taxes. Some states charge property taxes upfront, some post-collect, and some collections depend on the time of year.

Taxes are usually paid in two installments. Next, you need to find out if the period you are closing includes any prepaid taxes. If taxes are prepaid and you are the seller, a credit will be given. If taxes are prepaid and you are the buyer, they will be charged. The opposite is true when taxes are not yet due and payable - sellers receive a direct debit and buyers receive a loan.

In some situations, even if taxes are not yet due and payable, when your closing date is near the tax due date, your nearer customer pays the taxes from the seller's proceeds. and charge the buyer accordingly.

Some billing buyers will not claim tax in the sales contract if it is apparent that the buyer is expected to reimburse the seller for a portion of the tax prepaid. In this situation, if you are a seller and you do not understand the meaning of "no prorations", you will be paying tax for a period of time in which you are not occupying the property.

Homeowners Association Contribution Payments

Since most homeowners associations collect monthly dues upfront (some HOA bills quarterly or annually) if a seller has not yet paid the dues, the dues are paid out of the seller's proceeds. The seller receives a credit for the unused portion of the contributions.

For example, if the contribution is $ 300 per month, the daily payment is $ 10. If a transaction closes on the 10th of the month, the seller will be billed 10 days of HOA fees or $ 100. The buyer pays $ 200 for 20 days of HOA dues.

Rent prorations

The rent is usually paid in advance. Buyers purchasing an investment property expect credit for that portion of the rent that covers the period that the buyer owns the property.

A sale that closes November 15 and includes tenant-occupied property costing $ 1,000 a month would result in the buyer receiving credit for 15 days of prepaid rent or $ 500.

The seller receives a charge of $ 500. Security deposits held by the seller are also transferred as a credit to the buyer and as a debit from the seller to the buyer.

Insurance shares

Insurance premiums are paid in advance. Buyers typically take out new hazard / fire insurance when they buy a home. However, if the buyer accepts the seller's existing loan or buys on a land contract, a buyer can ask the seller to transfer the existing insurance policy.

Fire insurance is transferred with or without consideration. In return, the seller will be reimbursed for this period if the seller does not own the property. Regardless, it means that there will be no prorations. Most buyers will get a new policy today.

Instructions for use

It is not often that utilities are prorated, but shares apply to specific communities. In Sacramento County, for example, if a seller fails to pay the county or municipal utility (water, sewer, garbage), then the utilities roll on the tax bills.

Suppliers will then be deducted from the tax bill for prorations and the buyer will be offset against future tax bills. You will see that this situation occurs with short sales and foreclosures because if the seller fails to make the mortgage payments, the seller is unlikely to pay the utility bills either.

At the time of writing, Elizabeth Weintraub, CalBRE # 00697006, is a Realtor Associate with Lyon Real Estate in Sacramento, California.