What is a Statement of Adjustments?

What is a Statement of Adjustments?  (And how do I read one?)

The most important document that you will see in your real-estate transaction, whether you are buying or selling a property, is the Statement of Adjustments.  Unless you’ve bought and sold a number of properties or you’re involved in this industry, the very name of the document is a bit of a mystery.  What is an “adjustment,” and how will understanding a “statement” full of them useful to you?

If you’re like me, you might get right into reading this and find a lot of useful information here, and you can really go crazy and read the second half of this post to get into the more technical stuff.  However, if you prefer the multimedia approach for easier brain absorption, please check out my Statement of Adjustments Explainer Video.

What is an Adjustment?

When you sign a real-estate purchase contract, you are agreeing to buy or sell a specific property, on a specific day and at a specific price. There are a number of other promises and obligations found in a typical contract, but that’s really the heart of it.  However, the “purchase price” for the property in the contract doesn’t take into account whether the Seller prepaid their property taxes for the month or the year in which the purchase takes place; or if condo fees have been paid to the end of the month; or if homeowner’s association encumbrances have been prepaid or are outstanding for example.  If you’re buying that property, you don’t want to be responsible for the Seller’s financial obligations.

This is where the most common “adjustments” to the purchase price come in. Your lawyer investigates all items that the contract deems to be adjusted.  We start with the purchase price and add on anything that the Seller has prepaid past the date that the Buyer takes over the property, and then we subtract anything that the Seller is responsible for up to the same date but will not have paid for when the property is turned over. For the sake of a later point I would refer to these kinds of adjustments as “timed adjustments” because they are about taking into account the time at which these obligations change from the Seller to the Buyer.

Okay, so what is a “Statement” of Adjustments?

From there, when you think about what a Statement of Adjustments is, it’s a lot like your monthly bank statement or a credit card statement.  The purchase price is the “starting balance” and at the bottom: a figure called the “Cash to Close”—which is like the ending balance on your bank statement.  In between is each credit to the Seller for prepaid amounts and each credit to the Buyer for unpaid amounts which are respectively added to and subtracted from the price as described above. 

The Cash to Close could really be called the “Adjusted Purchase Price” and it is the amount that has to be paid to the Seller on the agreed upon date in order for everybody to have paid for their responsibilities.

A couple of final notes before I give a brief final summary:

1.     One other thing that you almost always see on a Statement of Adjustments is a credit to the Buyer for the total of all deposits that they pay toward the purchase price before the final closing date.  Hopefully the reason for this makes sense as well to you.  Instead of the deposit being refunded to the Buyer after the Buyer has paid the full Purchase Price, it’s simpler and safer to just subtract the amount of the deposits from the Purchase Price and let the Seller keep them.  This is an “adjustment” in the Statement of Adjustments. For Sellers, the deposits have typically been paid to the real-estate brokerage you are working with and are usually used toward paying real-estate commissions that are the Seller’s obligation to pay.

2.     In addition to the deposits and the “timed adjustments” already mentioned, there is one less-common other category of adjustments—but worth mentioning briefly.  If there are any other additions or subtractions from the Purchase Price that the Buyer and Seller have agreed to in the contract or in an amendment, these will also show up as adjustments to the price.  Again this makes sense if the Cash to Close is supposed to be the final amount the Buyer owes to the Seller and, if there is some kind of agreed discount or additional charge, it makes sense to include that on the Statement of Adjustments in figuring out the Cash to Close.  The most common adjustment of this type in the Seller’s favor would be when someone is buying a brand new home and agrees upon a price, but then asks the Builder for changes during construction that are then charged as additional costs on top of the original purchase price.  These “extras” or “change orders” are often broken out as their own adjustments on the Statement of Adjustments so that it is possible for a Buyer to see each one added individually for transparency in showing how the purchase price changes as a result of
“extras” or credits (although some Builders will just lump them into the purchase price and not show individual adjustment).

There are numerous other examples that I could give for Buyer’s and Seller’s adjustments of the latter type, but I would also mention that it is my view that your lawyer should certainly be identifying these adjustments to you when you meet to sign documents and explaining each one to your satisfaction if you have any questions.

Summing Up So Far…

A Statement of Adjustments is a document that allows both the Buyer and the Seller to see how property taxes, condo fees, deposits and other items discussed above are used to determine the actual amount that the Buyer owes the Seller to complete the purchase. 

You can stop reading there… OR you can keep going for more specific and technical information about how some particular adjustments actually work and are calculated.

Additional Technical Details for the Mathematically-Inclined and Detail-Oriented

These details, really, are fairly technical if you want to nerd out on details, but do note that any given purchase contract may have been negotiated to change how these adjustments will work for a particular transaction. With that said, just because it is mentioned below as a normal adjustment doesn’t necessarily mean the same in your particular situation.

1.     All adjustments are normally calculated to the date of closing in the transaction. This means that there are no “free” days for either the Buyer or the Seller when a transaction closes on time.

2.     Most adjustments are done either monthly (most condominium fees and tenant rents) or yearly (property taxes and most HOA fees).

3.     Property taxes are billed based on the calendar year (Jan.-Dec.), but are paid to the city:

a.      Once a year, in which case they are due on June 30 each year.  This means that you actually pay the taxes in the middle of the year that you are being billed for, not at the beginning or the end.  This adjustment is often confusing for both Buyers and Sellers because they sometimes believe that paying taxes on June 30 is paying for the next twelve months, to June of the following year, but you should remember that is not the case.

b.     Monthly through the city’s TIPP plan where an amount that is roughly 1/12 of the taxes come directly out of your bank account on the first of each month.  Interestingly, for the first six months of each calendar year, the TIPP payment is based on the previous year’s tax assessment. Then, from July to December, they set a new payment amount so that whatever is owing on the current years taxes, after subtracting the first six TIPP payments, will be paid in full.

c.      Through scheduled instalments with the city. This can be one of the more confusing situations for lawyers. Calculating adjustments as instalments may look like TIPP payments at a glance, but they are often in different amounts and it can throw off the calculations fairly easily

4.     In Calgary, if you buy or sell a property in the first five or six months of the year, the property tax adjustment will really only be an estimate of what the actual amount should be.  This is because the city does not publish the current year’s tax rate until well after the budget is approved and this usually happens in early May.   Prior to that time, lawyers generally use the previous year’s tax rate to complete adjustments because there is no better “official” information to use. 

5.     People in Calgary often believe that the tax rate is actually set in January because the city sends out Assessment Notices and people see what value the city places on their property and believe that the tax rate is set by that point. It is not actually final until the “levy” is issued and the property tax rate is published.

6.     Property taxes are also interesting when you are dealing with a newly built home. It’s actually even too complex to get into in a summary article like this one. However, when dealing with a newly constructed property, there are often two tax bills issued and, depending on the timing, there may be a second property tax adjustment with the Builder months after you move into a new home.

7.     Most other yearly adjustments tend not to be billed the way property taxes are.  Things like HOA fees are usually billed 12 months in advance, and most are not paid on a calendar year.  In this case, the lawyer needs to figure out how far into the “billing year” the transaction falls and then adjust between the Buyer and Seller on that basis.

8.     There are MANY things that are not adjusted that you might think would be: cable TV/internet service; home security monitoring contracts; gas/electricity utility accounts; and many other services that are recurring periodic expenses of home ownership.  It can be hard to see the distinction, but the difference is that these items, if not paid, cannot be “attached” to a new owner of the property for the period of time prior to the new owner’s purchase of the property.  That should tell you something about the items that are adjusted and how important it is to have those adjustments done correctly because if they are not, a new home owner might end up paying.

The technical information given about calculations above is still a simplification of the actual details that go into the calculation of adjustments and, in my view, your lawyer should be both willing and able to explain how any of the particular adjustments that you see on a statement of adjustments was calculated—and why!

A Little bit about me…

I am a lawyer who has practiced real estate, business, wills and estates and employment law in Calgary since 2003. I have helped manage over 10,000 home transactions for clients in that time.  So when it comes to real estate, I haven’t seen it all just yet, but I have seen a lot…

Ryan Hager