What Does Prorate Mean in Real Estate Terms?
by Mary Gallagher
Prorating is commonly used in real estate sales contracts.
A lot of costs associated with owning or renting real estate are paid on a monthly or other periodic term. Real estate taxes, for instance, are generally due once or twice a year. Mortgages and rent are usually due every month. But not everyone begins a rental term on the first of the month or buys a property on the first day of a property tax season. Monthly and periodic costs like these are often prorated to reflect the proportion of time the property is rented or owned.
A rental lease for a home states the monthly rent is $3,000 and it is due on the first of every month. The landlord and tenant agree the lease will start on Nov. 15. If a full month's rent
is $3,000, a half month's rent would be $1,500. In an agreement in which the rent is prorated for November, the tenant would pay $1,500 for the rent from Nov. 15 through Nov. 30. A landlord does not have to prorate rent.
Some states provide a legal definition for the term prorate or pro rata. For instance, the Michigan Property Tax Act states that, unless otherwise agreed, real estate property taxes are prorated as though paid in advance of the tax year period. For instance, if the seller pays property tax on April 1 for a tax period covering July1 through June 30t and the house is sold on Oct. 1, the buyer must pay the seller for the period of Oct. 1 through June 30, or about 75 percent of the tax bill the seller paid in April.
Importance to the Bottom LineSource: homeguides.sfgate.com