Property Sellers – Be Sure your HUD Settlement Statement Adds Up

For some, the prorating of assessments may be wrong, especially if your assessments are included in your property tax bill.

March 4, 2008 – Palm Coast, FL – At a recent closing on a home in the Palm Coast, FL gated community of Grand Haven, the seller was nearly short changed by more than $1,200. The title company confused property taxes with assessments, which were included on the seller’s annual property tax bill. The problem may not be isolated. You need to understand the difference between paying in arrears and paying forward.

Property taxes are due annually, on January 1. They can be paid as early as November and are not deemed delinquent until April 1. Taxes due January 1, 2008 cover the year 2007. This means they are paid "in arrears." If you bought your property on July 1, the previous owner (seller) enjoyed ownership for half the year, but you get the tax bill for the entire year. To compensate, the seller is charged 50 percent of the tax bill at closing. (They actually divide the tax bill by 365 and charge the seller for each day the seller was in possession.)

The problem arises when non-ad valorem taxes, such as association fees, are included on the tax bill as they are for Grand Haven. (Non-ad valorem means that the amount is not determined by the value of the property.) While property tax covers the period from January 1 to December 31 and is paid in arrears, Grand Havens assessments cover a period from October 1 to September 30. They are paid in advance, or paid forward.

Here’s what almost happened. For simplicity, let’s not count days. I’ll use April 1 as the closing date to make the math easy. Property taxes on the Grand Haven property are $4,259.75. The non-ad valorem taxes total $1,723.00 comprised of a Grand Haven Community Development District (CDD) assessment of $1,689 and a Colbert Lane road construction bond payment of $34. Total tax bill; $5,982.75.  The preliminary HUD Settlement Statement prepared by the title company treated the entire amount as if it were property taxes, paid in arrears. The prorating assumed that the seller should pay 25 percent to the buyer, since the seller occupied the property for three of the twelve months covered by the tax. The seller would pay the buyer $1,495.69 (25 percent of $5,982.75) at closing.  But the assessments were paid in advance by the seller for the period of October 1 to September 31.

Here is the right way:

• The seller pays the buyer $1,064.94 for three month’s (January 1 – March 31) of the total property tax, which will be paid in arrears by the buyer at the end of the year.
• The buyer pays the seller $861.50 for six months (Oct 1 – March 31) for assessments which the seller had paid in advance.
• The net correctly paid by the seller to the buyer is $1,064.94 less $861.50, or $203.44.

If the error had not been caught, the seller would have been overcharged by $1,292.25. Be sure that you and the closing agent understand each prorated item. Review the HUD statement carefully.