Closing Escrow - Credits To The Buyer / Examples

  • Proration Credits - Proration credits are for expenses that the seller has underpaid or not paid as an ongoing expense. If the seller had paid or put money into escrow to pay these, the payment into escrow would be a Credit Entry.

Example: The owner has lived on the property for 3 months of the 6 month tax period and NOT paid the taxes. The seller will have to pay the 3 months of the buyer's property tax bill that will be due. The buyer will pay the whole tax bill in 6 months. The 3 months of taxes owed by the seller will be a credit entry on the buyer's closing statement. Payment of the owed taxes would be carried as a debit on the seller's closing statement.

  • Matching Credit and Debits. - Credits to the buyer will be those items the seller may owe the buyer. The seller on the other hand will carry the same item as a debit on his/her closing statement. Basically, there is a matching credit to the buyer and a debit to the seller when settling up costs of ownership.

Examples:

Prepaid Rent: If the property being transferred is a rental, the prepaid rent on a rental property would have matching debit and credit entries.

Proration Example: $300 rent paid on the 1st of each month on a rental property. Property sold on January 15, 2006 and there are 31 days in January. The seller has the right to rent up to the 14th. The buyer has the right to rent from the closing date (the 15th) to the 31st (16 days). Now we have to divide $300 a month by 31 days = $9.667 per day. The seller owes the buyer 16 days x 9.677 = $154.84.

  • At Closing - The closing statement would debit the seller for $154.84 and credit the buyer for that amount.
  • Unpaid Property Taxes - There are problems associated with proration of the property tax. Sometimes the property is sold before the tax bill has been received. The property tax would be an unknown. Another problem is that the seller may be paying taxes in payments and is delinquent on payments at the time of sale. The escrow office would have to determine the property tax and prorate the amount as a credit to the buyer and a debit to the seller.
    • Buyer Payment - The amount due from the purchaser at closing is the buyer's debits minus the buyer's credits. If there is a remainder entered amount, the buyer would have to pay it. This payment figure would then be entered into the credit column.
    • A "Forced Item" - The required (forced) amount would have to be paid by the buyer and the calculation would bring the buyer's credits and debits into balance.
  • Balance Out - The total of the buyer's debit and credit columns must balance (be equal). The forced payment is the final step in balancing out the closing statement for the buyer.