Massachusetts home buyers are responsible for certain "prorated" items in addition to their down payment, closing costs, pre-paid interest, and escrowed taxes.
What exactly is proration in real estate, and what typically gets prorated at closing? First, what does the word proration mean? [Proration: the act of dividing, distributing, limiting, or calculating something proportionately Source: Dictionary.com].
What is a Proration in Real Estate?
Prorations when buying a home are credits between the home buyer and home seller at closing, ensuring each party pays these costs when they own the home. They will appear as debits or credits on each party's closing settlement statement. The purchase and sale agreement used in real estate transactions contains proration language.
When buying a home in Massachusetts, prorations are charges or payments divided proportionally over a specific period. For example, the property taxes might cost $600 per month. If you're closing on June 16th, then the first month you live in the home – June 16th to June 30th – your share of the taxes will be a prorated $300 because you lived in the dwelling for precisely 50 percent of June. The homebuyer is responsible for the costs on closing day when calculating the prorated amount.
What Charges Typically Get Prorated at a Real Estate Closing?
There are several standard charges the seller and buyer prorate at closing.
In Massachusetts, homeowners received bills quarterly for property taxes based on a fiscal year starting July 1st. Cities and towns bill homeowners for real estate taxes, and the taxes are due on the first day of the middle month for that quarter. For example, for the fiscal year first quarter bill, the property tax is due August 1st. For the second quarter bill, the property tax is due November 1st, and so forth.
If you close on a Massachusetts home or condo on May 10th, for example, your prorated taxes due at closing will include (a) June's taxes, plus (b) 22 days' proportional taxes for the remainder of May. The sellers would have already paid the fourth quarter tax bill, as it would have been due by May 1st, so the sellers would be credited back the amount of taxes they pre-paid for that prorated period (May 10th through June 30th).
Condominium Fee or HOA Fee
Condominium or homeowner association ("HOA") fees are typically due the first day of each month. Whenever you close on any day other than the last day of the month, as a home buyer, you will rebate back the seller their prorated share of condo (or HOA) fees, which the seller has pre-paid. For example, if you close on November 20th, you'll credit the seller 11 days (November 20th through November 30th) of prorated condo fee.
Fuel (Oil and Propane) Proration
Generally, oil or propane fuel is personal property. The home buyer is responsible for reimbursing the seller for the current market value of the oil or propane remaining in the tank(s) at closing. The purchase and sale agreement will have language regarding fuel proration. Before the closing, typically at the final walk-through or a few days before, the homebuyers and their buyer agent observe the oil gauge and calculate the remaining oil. Sometimes a seller might have the company that delivers the oil or propane calculate the remaining fuel based on the current market value. Most oil tanks are 275 gallons and located inside a home. Propane tanks are outside the home, sometimes buried underground.
Tenants pay landlords monthly rent in advance, but homeowners pay mortgage interest in arrears. For example, when you make a mortgage payment on July 1st, you pay interest for June. Lenders want to collect interest for up to 30 days on a new mortgage before the first mortgage payment is due. If you close on, say, May 16th, your first mortgage payment will be due on July 1st. As the borrower, the lender will charge 16 days of interest on your settlement statement for May 16th through May 31st.
A homebuyer can figure out interest proration in the above scenario using the following formula:
- Loan Amount x Interest Rate = Annual Interest
- Annual Interest ÷ 12 Months = Monthly Interest
- Monthly Interest ÷ 30 Days = Daily Interest
- Daily interest x 16 Days (May 16th – May 31st) = Interest Proration Owed by the Homebuyer
Special Assessments or Municipal Betterments
Suppose you are buying a home and there is a municipal betterment or a special assessment from a homeowner's association, in the case of a condominium. In that case, there might be an option to pay off the special assessment or betterment at or before closing. If the obligation remains, the parties will prorate the fee balance at the closing. For example, a city or town might collect a betterment fee from a property owner when it brings sewer lines to a street for the first time. A condominium association might levy a special assessment to pay for a large project, such as the paving of a parking lot.
If you're buying an investment property with tenants remaining at the property, the seller and the buyer will prorate the rental income the seller has received from the tenant for the month the closing takes place. Rent prorations don't include security deposits or last month's rent. The seller can turn over deposits to the buyer, who will hold them the same as before the sale. The purchaser would then be responsible for the security deposit and last month's rent and the eventual disposition of those funds based on the current or future rental agreement terms.
Other Possible Prorations in Real Estate
While not typically prorated, a seller and buyer may have to prorate a water and sewer bill or a municipal electric bill in some rare instances.
The closing attorney's office will order a final reading if the property receives municipal water and sewer. The seller pays for any outstanding water and sewer bills at or before the closing. If the municipality sends a subsequent statement to either the buyer or the seller, and that statement covers the period the other lived at the property, the parties would prorate the bill accordingly. The parties typically agree to work together after the closing if subsequent costs need to be paid or prorated.
There are 41 municipal light plants (MLP) that provide electricity to 50 cities and towns in Massachusetts. Some municipalities that receive municipal electricity include Belmont, Braintree, Concord, Danvers, Georgetown, Groveland, Hudson, Ipswich, Littleton, Lynnfield, Mansfield, Middleton, North Reading, Peabody, Reading, Rowley, Shrewsbury, Wakefield, Wellesley, and Wilmington. You can see the complete list on the state's website.
When a city or town has a municipal light plant, there will have to be a final electrical meter reading – similar to the final water and sewer reading described above – and the account must be paid and closed at or before the closing. Again, in the rare instance that the municipality sends a subsequent electric bill to either the home buyer or the home seller, and that bill covers the period the other party lived in the home, the parties would prorate the outstanding balance accordingly.