PSI Virginia Real Estate Practice Exam

What are prorations in the context of a real estate closing?

1. An assessment of property taxes

2. Allocation of certain financial items

3. Adjustments of mortgage payments

4. Negotiations of property valuations

The correct answer is: Allocation of certain financial items

Prorations in the context of a real estate closing refer to the allocation of certain financial items between the buyer and the seller based on the time they owned the property during the billing period. This typically includes expenses such as property taxes, homeowners association fees, utilities, and insurance. When a property is sold, some costs may have already been incurred or paid by one party for a period that extends beyond the closing date. To ensure fairness, these costs are prorated, meaning they are divided proportionally so that the buyer pays their fair share for the portion of the billing cycle they will own the property while the seller is compensated for the time they owned it. For instance, if property taxes are due for a year but the sale occurs six months into that year, the seller may be responsible for the first six months, and the buyer for the remaining six, ensuring that both parties are equitably charged for the period they own the property. This practice helps maintain clarity and fairness in the financial settlement at closing.