Prorated Rent at Closing

7 Replies

Im getting ready to make my first offer on a quadraplex here in FL.  From what I understand from reading is that it's desirable to close on the 2nd, 3rd, or 4th of the month in order ti collect prorated rent from the seller.  I spoke to my realtor and she wanted me to put the closing on the 1st and said if I closed on the second it wouldnt be cash or transferred to us but could only count towards the closing costs or price.

Any input with clarity on this issue is greatly appreciated.

In my understanding no matter when you do it, the amount will show up on your HUD as a credit towards your cash at closing. You're not going to get cash for rents or deposits. Make sure that your contract clarifies that you will be credited for "accrued" rent rather than "collected" rents, that way if any tenants are behind you will still get the full amount of rent due rather than just what they've paid.

Rent is one of the standard adjustments at Close and, as you indicated, it is prorated for the duration of the current rental period that the property will be owned by you.  The pro-rated rent is credited to the purchaser while pre-paid expenses, such as property tax are debited.

When we acquire an occupied property, we like to Close between the 2nd and 4th of the month.   We also typically have a contract clause indicating in the event any of the rents are late, the vendor forfeits any claim on the uncollected amount - essentially, if it becomes our problem, its our revenue.   We also use a clause that indicates if a unit becomes economically vacant between the time our offer is accepted and Close, the equivalent of 2-months rent for the unit will be deducted from the sales price. [Naturally, exceptions would be for leases which were to terminate in that window of time and a month-to-month tenant who indicated in their estoppel they would be leaving prior to Close].

1(506) 471-4126

Thank you both for the input.  So if I'm understanding correctly both the pro-rated rent and the security deposits are given as credit towards the cash needed for closing costs.

Originally posted by @Ben Naughton:

Thank you both for the input.  So if I'm understanding correctly both the pro-rated rent and the security deposits are given as credit towards the cash needed for closing costs.

 or the cash needed for purchase itself.   It just means you bring less cash to the lawyer or title company and allocate some of that into the Security Deposit account ... it's merely a virtual paper exercise.

1(506) 471-4126
Ben Naughton the reason you want to close on second or later is because it gives you a cushion on mortgage payment, has nothing to do with prorated rent. For example: close on Sept 1st, you have prepaid interest for Sept 1-30 and first payment is due October 1st. Close on Sept 2nd, you have prepaid interest for Sept 2-Oct 31st and first payment is due Nov 1st. It saves you the principal pay down for a month on your mortgage, which can be helpful as you transition the property/tenants. Good luck!
Originally posted by @Marco G. :
Ben Naughton the reason you want to close on second or later is because it gives you a cushion on mortgage payment, has nothing to do with prorated rent.

For example: close on Sept 1st, you have prepaid interest for Sept 1-30 and first payment is due October 1st.

Close on Sept 2nd, you have prepaid interest for Sept 2-Oct 31st and first payment is due Nov 1st.

It saves you the principal pay down for a month on your mortgage, which can be helpful as you transition the property/tenants.

Good luck!

I can see how that might be attractive.   Our mortgages don't work quite the same - plus we normally make bi-weekly payments.  

On occasions when we have had lenders unable to take the first payment until a full payment cycle (be it two weeks or one month) after Close, we normally make a principal pre-payment in the amount of our planned payment as it's in our best long-term interest.

1(506) 471-4126

We give a credit on the HUD for the amount of pro rated rent.

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