Friday, November 19, 2010

query: what if property taxes change after closing, does that impact prorations?

Hi Diane,

I didn't see on your blog where I could post my question, so hope you don't mind me writing to you.

I'm about to close (Nov 30) on a home for the first time, so I've been studying everything I can to try to be prepared at closing, and avoid any surprises, especially financial ones.  I'm wondering about the settlement of pre-payed property taxes.  The seller bought at the height of the market, so the current taxes are probably close to what they will be for me based on the recorded sale price.  If I have to reimburse the seller for three months of prop taxes at $700/month, but my property tax bill is only going to be $350/month for those same three months, does this get adjusted in the HUD-1?  Or do I lose out and should be thankful that my property taxes will be lower than the seller's were?



Hi, Dan:

Thanks for sending me the email and I'll post your question so it will be there to help others.

If what we are talking about is pre-paid taxes, meaning the taxes that the seller has already paid, then we're really just reimbursing the seller dollar for dollar for a lienable item that they paid beyond the date of their ownership of the real estate.  We call this proration and it will be listed on the first page of your HUD-1 settlement statement near the beginning, just after the sales price.

Most title agents will include in the papers you sign at closing, some sort of agreement that prorations will be based upon the best available figures at closing, meaning the current bills.  There may even be an exception in your title insurance commitment that refers to bills currently due and payable.  This is to avoid controversy in the event the tax assessment is altered after closing that creates an increase or decrease in the tax bills which is retroactive.

You should plan to reimburse the seller based upon the bills as they exist now unless you and the seller negotiate otherwise.

Does this help?  If I have misunderstood the question, just post a response on the blog or shoot me another email. Take care and may I applaud your careful research as a savvy buyer.  We need more consumers like you!   ;)


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