Many of my buyer clients ask me this questions when they get the Statement of Adjustments from the Builder or their Lawyer Here's a quick explanation:
Simply, the statement includes 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 vendor (builder) on closing day. Please note, the final price set out in the Agreement of Purchase and Sale is rarely the same amount that will be transferred on closing (as there are a number of items that need to be adjusted for). For example:
Deposit paid - Paying a deposit on signing is standard practice in any real estate transaction. It could be a set amount or a percentage of the purchase price. The deposit amount is deducted off the purchase price, as it has already been paid.
Extras and credits - When the home being bought is new construction, it’s 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. Almost always, these amounts are all adjusted at closing as extras or credits.
Taxes - Resale residential housing isn’t generally subject to HST in Ontario, but new homes are. Check your Agreement of Purchase and Sale to see if it's dealt with there, otherwise, the applicable tax will be added to the purchase price. Mostly, the agreed purchase price includes all taxes, with the provision that the purchaser assigns the HST Rebate to the vendor. .
Rebates - In some cases, the purchaser may be entitled for rebates from the Vendor for problems that may arise after the agreement is signed. For example, as a result of conditional (to home inspection) sale, if there are deficiencies identifed, the vendor and purchaser may need to negotiate a rebate to fix the problem. Similarly,in the case of a resale, if the property is damaged while the Vendor is moving out, there could be a rebate for repairs.
Property/Municipal taxes - In mosyt cases (depending on date of closing), the vendor/homeowner prepays taxes to the end of the month, quarter or year. In that case, the vendor is entitled to a credit for the portion of taxes that have been prepaid (unless otherwise stated in the agreement). Where it's a newly constructed property where taxes have not been assessed, most agreements require the lawyer to holdback a portion of proceeds from the vendor for that purpose.
Heat/Hydro/Water adjustments - If the home has oil heating or propane tanks, the purchase priceis usually adjusted to reflect the value of fuel remaining in the tank. The tanks are measured on closing day (or as determined) and the vendor gets a credit for leftover fuel. In all other cases, the adjustements are made based on meter readings on or day before closing.
Rent and damage deposits - If the property is a rental property and is occupied by tenants, the purchaser usually gets a prorated credit for the rent for the rest of the month/term. If the tenant has paid a damage deposit, this whole amount is transferred to the purchaser, as he/she will be responsible for returning it at the end of the term of the lease.
The Statement of Adjustments is generally prepared by vendor’s lawyer well in advance of closing and is sent to the purchaser’s lawyer for review. All errors (if any) are corrected at that point.
Don't be afraid to ask your lawyer to explain anything you don't understand.