What Does Prorate Mean in Real Estate Terms?

Real estate transactions often go through an escrow process. During this time, the buyer places funds into a secure escrow account while the terms of the contract are completed. If working with a title and escrow company, the escrow officer oversees the process, which includes conducting a title search on the property, collecting funds from the buyer, paying off the property debts, and recording title for the buyer before issuing funds to the seller. When paying off the property debts, some items are the responsibility of the buyer, and some are the responsibility of the seller. The term "prorate" comes into play when calculating these debts.

Prorations

The term "prorations" refers to the expenses paid in advance or in arrears during the escrow process. During a typical escrow process, the escrow officer divides or distributes the expenses between the buyer and seller, according to which party is responsible for the charge at the close of escrow.

Prorate

Prorate refers to the process calculating the prorations. Common expenses subject to this process includes property tax, utility bills, interest on assumable mortgages, and homeowner’s association dues. By prorating an expense, the buyer and seller may each pay a certain percentage in relation to how long each owned the property during the period of the expense. When prorating expenses, the escrow officer or party making the calculations considers accrued items and prepaid items.

Accrued Items

Accrued items are a credit to the buyer. Accrued items are expenses that the seller used prior to the close of escrow, yet hasn’t yet paid for. For example, some states bill property tax in arrears. This means the property owner receives a property tax bill for a year already past. Therefore, at the close of escrow, the property tax bill currently due is for a year the seller lived in the home, and the seller, not the buyer, is responsible for the bill.

Prepaid Items

Prepaid Items are a credit to the seller. Prepaid items are expenses the seller paid for, but has not yet used. For example, if the state charges property tax for the upcoming year, instead of billing in arrears, the seller, current on his property tax, has already paid for a period in which the buyer will own the property. When calculating the prorations, the seller receives credit for prepaid expenses on the property, while the buyer receives credit for accrued expenses on the property.

References

• "Modern Real Estate Practice"; Galaty, Allaway and Kyle; 2006