Who Pays for Utilities on Closing Day?
Understand how utility costs are fairly divided between buyers and sellers on real estate closing day to ensure a smooth transaction.
When buying or selling a home, one common question that arises involves who pays for utilities on closing day. This aspect of real estate transactions can often lead to confusion for both parties involved. Understanding how utility costs are managed and allocated during the closing process is an important part of a smooth transition of property ownership.
Understanding Utility Proration
Proration is a fundamental concept in real estate transactions, ensuring that expenses are divided fairly between the buyer and seller based on their respective periods of ownership. For utilities, this means the seller is responsible for costs incurred up to the closing date, and the buyer assumes responsibility from that date forward.
Common utilities typically subject to proration include electricity, water, gas, and sometimes trash or sewer services. While some utilities like water and sewer may be tied to the property and can result in liens if unpaid, others such as electricity and gas are usually linked to the individual account holder.
The Proration Calculation Process
Calculating prorated utility amounts involves specific steps and factors, often managed by the closing agent, such as a title company or escrow officer. A final meter reading taken on or near the closing date is important for services like electricity, gas, and water. This reading establishes the exact usage for the seller’s period of ownership.
The calculation involves determining the daily cost of each utility. This daily rate is then multiplied by the number of days each party is responsible for. For example, if a utility bill is $90 for a 30-day month, the daily cost is $3. If the closing is on the 10th of the month, the seller would be responsible for 10 days of usage ($30), and the buyer for the remaining 20 days ($60).
These financial adjustments are reflected on the closing statement, such as the Closing Disclosure, with appropriate credits and debits to ensure fairness. If the seller has prepaid utilities beyond the closing date, the buyer will typically reimburse the seller for the prorated portion. Conversely, any outstanding utility bills for the seller’s usage will result in a debit to the seller at closing.
Handling Utility Accounts and Deposits
Managing utility accounts around closing involves distinct responsibilities for both the buyer and the seller. The seller is generally responsible for contacting utility companies to schedule final readings and request service disconnection, or transfer to the new owner if the utility allows and it’s agreed upon. It is advisable for sellers to keep utilities active until at least the day after closing to allow for final inspections and prevent issues like frozen pipes in colder climates.
The buyer, in turn, is responsible for contacting utility companies to establish new accounts in their name, typically effective on the closing date. Utility deposits are another consideration; sellers usually receive their deposits back after their final bill is paid. Buyers will likely need to pay new deposits to establish service, as these are generally not transferred between parties. Clear and timely communication with all utility providers is important for a seamless transition.