As far as prorated taxes, especially when buying bank owned homes, it is best you spell it out in yoru offer that it is prorated and that each teh buyer and seller pay for what they are responsible for.
Please see my blog for tips and advice on buying bank owned homes.
You got your answer regarding closing costs but not the tax proration. We pay our taxes in arrears here so we are paying our 2009 real estate taxes in 2010.
The seller credits the buyer the taxes that are owed and they normally credit 105-110% of the most ascertainable tax bill to the buyer for what will be paid next year.
In a bank owned sale the bank will only credit 100% of the taxes to the buyer. Example: If you are closing 12/1/10 and both tax installments for 2009 were paid, the bank (seller) will credit the buyer 100% of 11 months plus 1 day of taxes. The new buyer will be responsible for the 2010 tax bill in 2011 so they are giving you that money as a credit ahead of time. That amount will show up on your closing statement as a debit from seller and a credit to buyer.
I hope this helps!
In addition to down payment requirements, buyer's closing costs typically can run 3-5% of the purchase price and often a buyer, especially a first time buyer, has the desire and the qualifications but not all the funds necessary to purchase. So the main reason sellers may offer to pay a buyers closing costs is to increase their potential pool of buyers which will increase the chance of getting the home sold.
BUT, the buyer needs to remember that the buyer's closing costs are just that, the buyer's and if the seller is willing to pay those costs they also would have been willing to sell the property less that amount to a buyer that didn't ask for those costs. Which means that the buyer that had their closing costs paid will pay property taxes on that 3-5% seller incentive for as long as they own the home (not really significant in the scheme of things but something to consider).
I have also noticed that if there are multiple offers, that the buyer that is not asking for closing costs has a small edge over those that do.
Best of luck,