Proration
Proration is the process of dividing expenses or income between the buyer and seller at the closing of a real estate transaction. This ensures each party pays or receives only their fair share based on the period of ownership.
In real estate, proration is essential for fairly allocating costs like property taxes, insurance premiums, and homeowner association fees. The closing date is the pivotal point, determining which party is responsible for which portion of the expense or income. Proration calculations ensure that neither the buyer nor the seller is unduly burdened or unfairly enriched.
Imagine a property sold on June 30th, and annual property taxes are $2,400. The seller owned the property for half the year (January 1st to June 30th). Proration would calculate the seller's share as $1,200, which they would pay to the buyer at closing to cover the taxes for the first half of the year.
Remember that proration always involves dividing costs or income proportionally based on time. Identify the date the property changes hands (closing date) and calculate the number of days each party is responsible for.
Related Terms
Practice Questions
Annual property taxes are $4,380. The property closes on March 15. If the seller has NOT paid taxes for the current year, how much does the seller owe at closing? (Use 365 days)
A property has annual property taxes of $3,600. The seller paid taxes through December 31, but the sale closes on October 1. How much does the seller owe the buyer as a proration?
Related Concepts
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
IRV stands for Income, Rate, and Value. It represents the relationship between Net Operating Income (I), Capitalization Rate (R), and Property Value (V).
Daily rate calculation involves determining the cost or income per day by dividing the total amount by the number of days in the period (usually a year or a month). This is a fundamental step in proration.