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Adjustments
What Are Adjustments?
Standard form Agreements of Purchase and Sale require a deposit on the purchase price, with the balance payable on closing, subject to the usual adjustments. For resale homes, adjustments relate to costs that are payable before or after the closing date. These costs are pro-rated to the closing date, and the appropriate credit is given to you or the seller on the Statement of Adjustments to determine the final balance owing to the seller on the closing date. Adjustments are typically made for property taxes, prepaid condominium common expenses (if you are buying a condo), prepaid security monitoring services, prepaid flat rate water accounts, and fuel oil (if the home is heated by an oil furnace). Further adjustments are common if you are buying a newly constructed home from a builder (see new homes for more information).
Adjustments Example #1
The most common adjustment is for property taxes. Assume the following facts for the home you are buying:
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Property taxes for the current year |
$2,500.00 |
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Closing date of the purchase |
November 30th |
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Property taxes already paid by seller |
$2,500.00 |
|
Remaining tax installments owing to the city |
None |
Assuming the current year is not a leap year, the seller is responsible for costs of the property taxes for the first 333 days of the 365-day year (up to the date before closing). So the seller is responsible for (333 days / 365 days) x $2,500.00 of the current year’s property taxes, or about $2,280.82 of this year’s property taxes. Because the seller already paid the municipality $2,500.00 on account of this year’s taxes in our example, the seller would receive a credit of $219.18 on the Statement of Adjustments. You would be responsible for paying to the seller this additional $219.18 on the closing date because you are receiving the benefit after closing of the property taxes already having been paid for the rest of the year.
Adjustments Example #2
What if the roles were reversed, and the seller had not yet paid his or her pro-rated share of property taxes. Assume the following facts for the home you are buying:
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Property taxes for the current year |
$2,500.00 |
|
Closing date of the purchase |
September 15th |
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Property taxes already paid by seller |
$1,700.00 |
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Remaining tax installments owing October 3rd |
$800.00 |
Assuming the current year is not a leap year, the seller is responsible for costs of the property taxes for the first 257 days of the 365-day year (up to the date before closing). So the seller is responsible for (257 days / 365 days) x $2,500.00 of the current year’s property taxes, or about $1,760.27 of this year’s property taxes. Because the seller only paid the city $1,700.00 on account of this year’s taxes in our example (the final installment not required to be paid to the city until after the closing date), you would receive a credit of $60.27 on the Statement of Adjustments, thereby reducing your payment obligations to the seller on the closing date by this amount. However, you would be responsible for paying the property tax installment of $800.00 to the city on October 3rd. |
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