Buying or Selling a Home and the TREC Contract
If you are buying or selling a home in Texas, you are likely using the TREC One to Four Family Residential Contract. While most people focus on the sales price or the repairs, there is a small section that can lead to a multi-thousand-dollar surprise months after you move in: Paragraph 13, Prorations.
What Does Proration Actually Mean?
In plain English, “proration” is the act of splitting the bills. It ensures that the buyer and the seller each pay only for the days they actually owned the home during the year.
According to Paragraph 13:
- Taxes, interest, and HOA dues are split at the closing table based on the Closing Date.
- The seller pays their share from January 1st up to the day of closing (usually as a credit to the buyer).
- The buyer takes over from the closing date through the end of the year.
The New Construction Land Value Trap
This is the most common way buyers lose money on a new build. When a builder sells a brand-new home, the tax bill for that year is often based on the value of the property as it sat on January 1st. On that date, your home was likely just a vacant lot.
The Problem: At closing, the title company calculates tax splits based on the land value only, because the County Appraisal District hasn’t updated records to show a finished house yet.
The Consequence:
- At Closing: The builder gives you a tiny credit (perhaps a few hundred dollars) for their share of the “land only” taxes.
- In December: The real tax bill arrives, and it includes the value of the entire finished
- The Result: You, the buyer, are stuck paying a massive bill (thousands of dollars) that is way higher than the credit you received.
Does This Affect Resale Existing Homes Too?
Yes! While new construction is the most frequent culprit, buyers of existing homes can also be hit with a “Lost Exemption” surprise.
If the seller had a Senior/Over-65 or Disability Exemption, their taxes were likely deeply discounted.
- The Trap: You receive a credit at closing based on the seller’s discounted
- The Reality: When you buy the home, those exemptions The final bill will be based on the full market value.
- The Benefit: Under Paragraph 13, you can go back to the seller and ask them to pay their share of the actual bill (without the discounts they enjoyed).
The Post-Closing Adjustment: Your Secret Weapon
Paragraph 13 contains a powerful sentence that many people overlook:
“If taxes for the current year vary from the amount prorated at closing, the parties shall adjust the prorations when tax statements for the current year are available.”
This is a legally binding requirement for the buyer and seller to “square up.” Since the contract “survives” closing, the builder or seller is still contractually obligated to pay their fair share of the actual final bill.
What you should do:
- Mark your calendar: Check your actual tax bill in October or November via your local Tax Assessor-Collector’s website.
- Calculate the difference: See what the seller actually owed for the months they owned the home based on the new, higher bill.
- Request a credit: Reach out to the builder or seller and ask for the
Pro-Tips for a Smooth Experience
For Buyers:
- The Escrow Cushion: Be prepared for your mortgage payment to jump in year two. If your lender used “land only” estimates, you will have an escrow shortage. Review your Escrow Disclosure Statement to prepare.
- Call Your Realtor: This math is tricky! Always go back to your REALTOR; they are your best resource to help calculate the difference and contact the builder or seller on your behalf. I have helped my buyers recoup thousands of dollars by proactively monitoring their tax assessments and initiating the “post-closing adjustment” process.
For Sellers:
- Update Your Address: Ensure the title company has your new contact info. If the buyer reaches out for a tax adjustment later, you want to handle it professionally.
- It’s Not Always Final: Remember that “Closing” isn’t always the end of your financial responsibility. Paragraph 13 is a promise to settle up later.
While Paragraph 13 is legally binding, builders and sellers don’t always volunteer to pay up months after a deal is closed. You need an advocate who knows exactly how to audit these numbers. When you hire me as your REALTOR®, my job doesn’t end at the closing table; I ensure that “fairness” isn’t just a word in a contract, but money back in your pocket.
Read More Blog Articles
When home shopping, things aren’t always what they seem. All the bells and whistles of a shiny new home could distract you from making note of questionable issues.
In late 2025, Texas voters approved a massive overhaul of property tax exemptions. These changes are in full effect for the 2026 tax year and, crucially, apply retroactively to the 2025 tax year.
