When you’re completing a real estate transaction, you may wonder how to sort out all the finances in the end. This blog will give you the answers you need about a Statement of Adjustments in real estate!
Buying or selling a home in Guelph involves several financial calculations, one of the most important being the Statement of Adjustments. This document ensures that both buyers and sellers only pay their fair share of expenses related to the property transfer. If you’re planning to buy or sell real estate, understanding the Statement of Adjustments can help you avoid surprises and budget accurately for closing day.
In this blog, we’ll break down what a Statement of Adjustments is, why it matters, and how it affects both buyers and sellers.
What Is a Statement of Adjustments?
A Statement of Adjustments is a document from your lawyer that outlines financial adjustments between the buyer and seller to ensure a fair transaction. It lists everything that has been pre-paid, as well as all expenses and credits that a buyer or seller will receive upon the closing date.
Why Is a Statement of Adjustments Important?
This statement ensures that each party only pays for the portion of ownership they are responsible for. This is particularly relevant when there are prepaid expenses like property taxes, utility bills, and condo fees.
Like property taxes, real estate transactions involve multiple costs. Some of these have already been paid in advance by the seller. The Statement of Adjustments ensures that:
- Buyers don’t overpay for expenses they weren’t responsible for before they owned the property.
- Sellers get reimbursed for any prepaid costs that extend beyond their ownership period.
- Both parties settle their financial obligations fairly before the transaction is finalized.
Without this document, there could be confusion or disputes over who owes what after the closing day.
Who Prepares the Statement of Adjustments?
A lawyer or notary prepares the Statement of Adjustments as part of the closing process. Both the buyer’s and seller’s lawyers will review the document to ensure the calculations are accurate before the final closing payments. The lawyer will then go over this with you as part of the closing costs process.
Key Components of a Statement of Adjustments
The Statement of Adjustments contains several important sections. It’s almost like a ledger, where it shows you your expenses (debits) and then credits, including:
1. Purchase Price
This is the purchase price of the property. It always starts with this.
2. Deposit
The amount of the real estate deposit paid upfront that the listing brokerage is holding onto. The lawyer will deduct this amount from the total amount owed by the buyer.
3. Adjustments for Prepaid Expenses
Some expenses may have been prepaid by the seller. The buyer is responsible for reimbursing the seller for any portion that extends beyond the closing date. This is done on the Statement of Adjustments as as we mention earlier.
Common prepaid expenses include:
- Property taxes: If the seller has paid property taxes in advance, the buyer must reimburse them for the period after closing.
- Condo fees: If the property is a condo and the seller has paid monthly maintenance fees, the buyer may need to pay back a portion.
- Utilities: Some Guelph utilities accounts may have prepaid amounts that need adjustment. In Guelph, this could be Alectra and/or Enbridge Gas
- Rental items: It’s quite possible that your hot water heater is a rental
- In the event of a rental property, if a tenant has pre-paid rent that extends for a period after the closing date, a credit should be given to the buyer for that amount.
4. Adjustments for Unpaid Expenses
Just like a credit to the seller if pre-paid, if the seller hasn’t paid certain expenses before closing, they may need to compensate the buyer. For example:
- If property taxes are unpaid, the buyer may require a credit to cover the overdue amount. The lawyer takes from the proceeds of the sale
- If a tenant has paid rent for the month in advance, the seller must provide a credit to the buyer for the portion that applies after closing
5. Total Amount Due on Closing
After all adjustments are complete, the document calculates the final amount the buyer must pay to complete the purchase. This amount includes:
- The purchase price (minus any deposit paid).
- Any adjustments for prepaid or unpaid expenses.
- Legal fees and closing costs.
Example of a Statement of Adjustments
Let’s say a buyer is purchasing a home for $500,000, with a closing date of July 1st. The seller has already paid property taxes for the full year (January 1st to December 31st) in the amount of $4,800. As a result, the buyer will own the home for half the year (July 1st to December 31st). Therefore, the seller must reimburse the seller for six months’ worth of taxes:
- Total annual property taxes: $4,800
- Daily property tax rate: $4,800 ÷ 365 = $13.15 per day
- Days the buyer will own the home (July 1st to December 31st): 184 days
- Amount buyer owes seller: 184 × $13.15 = $2,420.60
The lawyer would add $2,420.60 to the final amount the buyer must pay on closing.
How Buyers and Sellers Can Prepare
For Buyers:
- Review the Statement of Adjustments with your lawyer to understand all charges.
- Budget for closing costs, which may include legal fees, land transfer taxes, and title insurance.
- Ensure you have the correct amount of funds ready for closing day. This is very important!
For Sellers:
- Keep records of all prepaid expenses to verify the adjustments.
- Work with your lawyer to ensure accurate calculations.
- Understand any deductions that may apply to your final payout.
Common Questions About the Statement of Adjustments
1. Can the Statement of Adjustments change before closing?
Yes, adjustments are complete if there are changes to the closing date or new expenses that you need to account for. Sometimes, it can’t even be correctly done before closing and is done afterwards, although rare.
2. What happens if there is a dispute over the adjustments?
If buyers or sellers disagree with the calculations, their lawyers can negotiate and resolve discrepancies before closing. Keeping clear records of expenses helps prevent disputes.
3. Does every real estate transaction require a Statement of Adjustments?
Most property transactions involve a Statement of Adjustments. Especially, when dealing with prepaid expenses or outstanding costs.
Still have questions about a Statement of Adjustments?
Get in touch with Beth and Ryan Waller, Guelph REALTORS®! They can help you navigate the purchase or sale of a home.
