What is a statement of adjustments?
The Statement of Adjustments often catches many homebuyers off guard. Put simply, the Statement of Adjustments sets out any items that need to be added or subtracted from the purchase price, and shows the total amount of money that the purchaser will have to pay to the builder on closing day. The items that will be adjusted on closing are set out in the Agreement of Purchase and Sale. These items may be negotiable with the builder BEFORE the Agreement of Purchase and Sale is signed. Very rarely is the purchase price set out in the Agreement of Purchase and Sale the same amount that will be transferred on closing, as there are a number of items that need to be adjusted for, including:
Deposit paid – A deposit on signing is standard practice in any real estate transaction, and can be a set amount ($500 used to be standard in St. John’s, but it is quickly increasing to $1,000) or a percentage of the purchase price. The purchaser gets to deduct this deposit off the purchase price, as it has already been paid.
New construction extras and credits – When the home being bought is a new construction, it’s very common to see changes made to the materials used or the allowances for things such as flooring, light fixtures, cabinets, and so on, or changes to the floor plan and construction methods. These are all adjusted at closing as extras or credits.
Taxes – Used residential housing isn’t generally subject to GST/HST in Canada, but new homes are. If the Agreement of Purchase and Sale doesn’t deal with this otherwise, the applicable tax will be added to the purchase price. However, it is quite common to see the agreed purchase price include all taxes, with the proviso that the purchaser assigns the GST/HST Rebate to the vendor. The details of how this rebate works are too boring to go into in this post.
Rebates – In some transactions, the Vendor will rebate money to the purchaser for problems that arise after the agreement is signed. For example, if the sale is subject to a home inspection and the inspection reveals an electrical panel that needs replacing, the vendor and purchaser may negotiate a rebate to reflect the cost of fixing this problem, rather than having the panel actually replaced. Similarly, if damage occurs as the Vendor is moving out, there may be a rebate for repairs.
Municipal taxes – In many cases, the homeowner has prepaid taxes to the end of the year or, in some cases, end of the month or quarter. The vendor is usually entitled to a credit for the portion of taxes that have been prepaid for the rest of the year. For example, if annual property taxes are $2,000 per year, and the house sale closes on October 1st, the vendor will get a credit of $500. The same goes for water taxes, if these are calculated separately and paid in advance.
Oil or fuel adjustments – If the home has oil heating or propane tanks, the purchase price will usually be adjusted to reflect the value of fuel remaining in the tank. The tanks will be measured on closing day (or sometimes the day before), and the vendor will get a credit for the amount of fuel that is left. For example, if an oil tank is half full (or half empty!) on closing day, and the value of half a tank of oil is $450, this would be credited to the vendor.
Rent and damage deposits – If the property is being used as a rental property and has tenants in place, the purchaser usually gets a prorated credit for the rent for the rest of the month. Similarly, if a damage deposit has been paid by the tenants, this whole amount gets transferred to the purchaser, as he or she will ultimately be responsible for returning in when the tenant eventually leaves. The physical deposit usually doesn’t change hands, it is just given as a credit towards the purchase price.
The Statement of Adjustments is generally prepared by vendor’s lawyer well in advance of closing and sent to the purchaser’s lawyer for review. There may be some finagling of the numbers and negotiation between the two sides, but generally it’s pretty straightforward.
The best advice is to review your Statement of Adjustments early and don’t be afraid to ask questions. And then ask them again!