California Real Estate Broker ExaminationTransfer of PropertyMedium
A buyer is closing on a new home. On the final closing statement, the property taxes for the current year, which were paid in advance by the seller for the entire year, will appear as a credit to the seller and a debit to the buyer. This adjustment of financial obligations between buyer and seller at closing is known as:
- AProration
- BReconveyance
- CSubrogation
- DEscrow Holdback
Show answer & explanationAnswer & explanation
Correct answer: A. Proration
Proration is the process of proportionally dividing financial obligations, such as property taxes, insurance, or HOA dues, between the buyer and seller based on the actual day of closing.
Why the other options are wrong
- B. Reconveyance is the transfer of title from a trustee back to the trustor after a loan is paid off.
- C. Subrogation is the right of an insurer to pursue a third party that caused an insurance loss.
- D. An Escrow Holdback is money held in escrow after closing to cover potential future expenses or repairs.
Proration
The proportional division or distribution of expenses and income, such as property taxes, insurance, or HOA fees, between the buyer and seller at the closing of a real estate transaction.
- Calculated as of the closing date
- Ensures each party pays for their period of ownership
- Appears on the closing statement (debits and credits)
- Common for property taxes, HOA dues, mortgage interest, rents
Memory trick: Proration: 'Proportionally' dividing 'payments'.