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LESSON 19 STATEMENTS OF ADJUSTMENTS Required Reading 1. UBC Real Estate Division. 2016. Real Estate Trading Services Licensing Course Manual. Vancouver: UBC Real Estate Division. Chapter 24: Statements of Adjustments and Completion of the Sale General Objectives In general terms, this lesson aims to instruct students in how to complete a real estate transaction. Students should have an understanding of statements of adjustments, and of the items which are included on these statements. Students must also be familiar with the final steps taken to close a real estate sale. Learning Objectives Upon completion of this lesson a student should be able to: 1. discuss what information is required to complete the conveyancing documents, including the statements of adjustments, for a seller and a buyer; 2. describe generally what steps are taken between signing the contract of purchase and sale and completion; 3. describe the usual procedures and documents that lawyers or notaries use to complete the transaction set out in the contract of purchase and sale; 4. correctly calculate adjustments for various items including mortgages, property taxes and rent; 5. correctly designate items appearing on statements of adjustments as either debits or credits; and 6. prepare a seller's and buyer's statement of adjustments. Instructor's Comments Statements of adjustments are the means used in a real estate transaction to reflect any adjustments in the purchase price which have been provided for in the contract of purchase and sale. Adjustments are necessary in part, because payments in respect of land use or ownership are made at various intervals during the year and respecting diverse matters. For example, taxes may be paid by owners in monthly installments or may be paid on one or two due dates during the year. The payments, however, are respecting the calendar year. The statements of adjustments provide a convenient method of detailing the calculations relating to the balance due from the buyer and the balance due to the seller on the completion date, taking into account the fact that the seller may (for example) have already paid the taxes relating to a part of the year during which the buyer will actually own the property. On a purchaser's statement, one is calculating the amount of cash the purchaser must be able to provide to the conveyancer in order to complete the transaction. On the vendor's statement, one is calculating the amount of cash the vendor will receive on completion. These amounts are not the same; consequently, it is important for the reader to treat each statement separately. The purchaser's statement and the vendor's statement are not comprised of identical information. The statements of adjustments contain what can be considered financial information about how the real estate transaction is being financed. The accompanying notes contain information about the closing procedure as well as an explanation of the method used to calculate the more complicated adjustments. The notes accompanying these examples are intended to explain the statements' operation to students, and are not examples of the types of notes that accompany real statements of adjustments.
19.2 Real Estate Trading Services Licensing Course Workbook The most common mistake with statements of adjustments is the tax adjustment. There are three types of situations presented: (1) taxes previously paid by the Vendor, (2) taxes to be paid in the future by the Purchaser, and (3) taxes due but not yet paid. For case (1), the Purchaser will have to compensate the Vendor, because the Vendor has already paid the taxes even though they will not own the house after the adjustment and completion date. The Purchaser will compensate the Vendor from the adjustment date until the end of the year, December 31. For case (2), The Vendor will have to compensate the Purchaser for the amount of taxes from January 1 until the adjustment date when the property is transferred over to the Purchaser. This is done because the Vendor owns the property up until the point of adjustment and completion so they must compensate the Purchaser for a portion of the amount that the Purchaser will pay in the future. For case (3), The Vendor is required to pay the taxes and the penalty on the completion and adjustment date. The Purchaser will then be required to compensate the Vendor from that date until the end of the year, December 31. Calculating the taxes can be very confusing, but if students simply ask themselves a few questions they can come to a clearer answer. Who owns this property? Have the taxes been paid and are they due yet? Who is compensating who? Students also can get debits and credits confused. The best way to differentiate is to determine who is owed and what is owed to them. For cases of both the Purchaser and the Vendor, debits are amounts owing by the Vendor or Purchaser, and credits are amounts that have either already been paid by or are due to the Vendor or Purchaser. Note: Even though the property transfer tax may not be explicitly mentioned in all scenarios, for the purposes of this course, students should ensure that they always include it in their statements of adjustments. Also, in cases where another property is being used as part-payment for the main transaction, the vendor will be responsible for paying the property transfer taxes on the property being traded. Review and Discussion Questions As statements of adjustments can only be understood by actually doing the calculations, you may wish to choose 5-10 questions from your Examination Study Guide that are from Chapter 24. Please note that the corresponding chapter number for each question is listed in the back of the Examination Study Guide in the Answer section. It is a good idea to do these review questions now so that you become familiar with the types of questions that you will see on your examination. In addition, you might also find it useful to work through the following problems and to discuss your answers with your fellow students, prior to attempting the assignment. Note: Unless stated otherwise, assume that it is NOT a leap year in the following Review and Discussion questions: 1. A vendor and purchaser signed a contract of purchase and sale of land on May 13 which provided for a completion, adjustment and possession date of August 17. The sale price is $375,000 and the purchaser will assume the existing first mortgage in the amount of $150,000. She will also arrange a new second mortgage in the amount of $75,000. The bank will deduct $525 for appraisal fees from the second mortgage funds before advancing the balance to the purchaser's conveyancer. No property transfer tax exemptions apply to this transaction. The real estate brokerage is charging a commission of 5% on the first $100,000 and 2.5% on the balance. The taxes were due on July 1 in the amount of $2100. Because they are now overdue, a penalty of $250 is also owing. The purchaser's conveyancer will be charging $1492.50 as fees for handling the conveyance. The purchaser has paid a deposit of $50,000 to the brokerage. Prepare statements of adjustments for the purchaser and the vendor.
Lesson 19 19.3 2. Velma has signed a contract of purchase and sale of land dated December 18 to sell her property on Elm Street to Patsy with a completion, adjustment and possession date of February 20. The sale price is $178,000 which Patsy will pay as follows: (i) She will transfer her 50' sailboat in trade to Velma, which they have agreed is worth $100,000. (ii) She will arrange a $70,000 mortgage. (iii) She has paid a $5,000 deposit to the brokerage. (iv) She will pay the balance in cash. The current year's taxes are unknown but must be adjusted. The taxes will be due on July 1. Velma's taxes were $780 last year and the parties have agreed they will increase 15%. The house is heated by oil and the oil tank was filled on December 18 at a cost of $150. The conveyancing fees on the Elm Street property are $560. The house is currently rented to a tenant who pays $350 per month rent on the 1st of each month. His security deposit, including interest accrued as of February 20, is $178.12. No property transfer tax exemptions apply to this transaction. The licensee retained by Velma expects a commission of 5% on the sale price of Elm Street. Velma is required to pay out her existing first mortgage. As of February 20 there is a balance of $100,000 owing on this mortgage. Legal fees with respect to discharging this 1st mortgage will be $75. Prepare statements of adjustments for the purchaser and vendor. 3. For each item listed below which might appear in statements of adjustments, indicate where it would appear (or that it would not) by placing an X in the appropriate box. Vendor's Statement of Adjustments Purchaser's Statement of Adjustments Item Debit Credit Will Not Appear Debit Credit Will Not Appear Existing first mortgage being assumed by purchaser Agreement for sale Real estate commission Penalty due on overdue taxes Purchaser's share of taxes already paid by vendor New first mortgage proceeds arranged by purchaser Vendor's share of taxes not yet due Legal fees for discharging an existing mortgage Deposit paid directly to vendor by purchaser Legal fees for conveyance Tenant's security deposit Property transfer tax Deposit paid into brokerage's trust account
19.4 Real Estate Trading Services Licensing Course Workbook 4. Please complete the chart as indicated. Tax Information Adjustment Date Number of Days to Purchaser Amount to Purchaser Number of Days to Vendor Amount to Vendor $1406 per annum will be due July 1 st not yet paid June 16 $1761 per annum overdue penalty owing $175.00 September 16 Last year's taxes were $1841. There will be an estimated 20% increase. Taxes will be due July 1 st. February 12 $781 per annum will be due July 1 st not yet paid May 17 $1651 per annum overdue penalty owing of $165.00 October 3 Last year's taxes were $1384. Purchaser's lawyer estimated a 17% increase. Taxes will be due July 1 st. April 14 Solutions 1. PURCHASER'S STATEMENT OF ADJUSTMENTS Debits Credits Purchase price $375,000.00 Deposit paid $50,000.00 Assumption of 1 st mortgage 150,000.00 2 nd mortgage proceeds (net) 74,475.00 Purchaser's share of taxes (Aug. 17 to Dec. 31-137 days @ $2100) 788.22 Conveyancing fees 1,492.50 Property Transfer Tax ($375,000! $200,000 = $175,000; 1% of $200,000 = $2,000; 2% of $175,000 = $3,500; $2,000 + $3,500) 5,500 Balance due to complete 108,305.72 $ 382,780.72 $ 382,780.72
Lesson 19 19.5 VENDOR'S STATEMENT OF ADJUSTMENTS Debits Credits Sale price $375,000.00 Assumption of 1st mortgage $150,000.00 Overdue taxes and penalty 2,350.00 Purchaser's share of taxes 788.22 Real estate commission 11,875.00 Cash proceeds of sale 211,563.22 $ 375,788.22 $ 375,788.22 Notes: (1) There is an alternate way of reflecting the 2nd mortgage proceeds, i.e., the gross proceeds ($75,000.00) could be reflected separately from the appraisal fee of $525. (2) The purchaser is responsible for the taxes on the adjustment date. (3) There is an alternate way of adjusting the taxes, i.e., charging the purchaser her share ($788.22) and then charging the vendor his share (Jan. 1 to Aug. 16-228 days @ $2100 = $1311.78) plus the penalty ($250.00). In that case, the vendor would not be credited with the purchaser's share. 2. PURCHASER'S STATEMENT OF ADJUSTMENTS Debits Credits Purchase price $178,000.00 Deposit paid $5,000.00 1 st mortgage proceeds 70000 Sailboat in trade 100000 Vendor's share of estimated taxes 122.88 Rental adjustment 112.5 Security deposit and interest 178.12 Conveyancing fees 560 Property transfer tax 1,780.00 Balance due to complete 4926.50 $180,340.00 $180,340.00 Notes: (1) The tax adjustments may be confusing. Remember that the taxes have not been paid because they are not yet due, but the calendar year of taxes started on January 1. As a result, the purchaser will eventually be billed for the whole year. It is only fair that she be compensated (credited) in advance with the estimated share of the vendor. As the purchaser is responsible for the date of adjustment, the purchaser should be reimbursed from January 1 to the day prior to the adjustment date. (2) The rental adjustment must be made because the vendor has collected a month's rent on February 1. Because the purchaser is taking over the property on February 20, she is entitled to 9 days rent for the month of February. (3) The purchaser will eventually have to repay the security deposit and accrued interest to the tenant, so she should receive credit for it from the vendor. (4) Because the vendor has agreed to accept the sailboat as part of the price, the value of the sailboat must be credited to the purchaser and debited to the vendor.
19.6 Real Estate Trading Services Licensing Course Workbook VENDOR'S STATEMENT OF ADJUSTMENTS Debits Credits Sale price $178,000.00 Sailboat in trade $100,000.00 Real estate commission 8,900.00 Pay out the 1st mortgage 100,000.00 Vendor's share of estimated taxes 122.88 Legal fees to clear title 75.00 Rental adjustment 112.50 Security deposit and interest 178.12 Balance due from vendor to complete!31,388.50 $ 178,000.00 $ 178,000.00 Notes: (1) In this case there will not be any cash proceeds of sale. Rather, the vendor must contribute $31,388.50 in order to provide a clear title to the purchaser. It would appear that in this example Velma is selling her revenue property at a loss. (2) An adjustment is not made for the oil remaining in the oil tank. This is a matter that is usually adjusted privately between the parties. 3. Vendor's Statement of Adjustments Purchaser's Statement of Adjustments Item Debit Credit Will Not Appear Debit Credit Will Not Appear Existing first mortgage being assumed by purchaser Agreement for sale Real estate commission Penalty due on overdue taxes Purchaser's share of taxes already paid by vendor New first mortgage proceeds arranged by purchaser Vendor's share of taxes not yet due Legal fees for discharging an existing mortgage Deposit paid directly to vendor by purchaser Legal fees for conveyance Tenant's security deposit Property transfer ta x Deposit paid into brokerage's trust account
Lesson 19 19.7 4. Tax Information Adjustment Date Number of Days to Purchaser Amount to Purchaser Number of Days to Vendor Amount to Vendor $1406 per annum will be due July 1 st not yet paid June 16 199 June 16 $766.56 166 Jan 1 $639.44 $1761 per annum overdue penalty owing $175.00 September 16 107 Sept 16 $516.24 258 Jan 1 $1,419.76 (This may be reflected as a debit of $1,936 and a credit of $516.24) Last year's taxes were $1841. There will be an estimated 20% increase. Taxes will be due July 1 st. February 12 323 Feb 12 $1,954.99 42 Jan 1 $254.21 $781 per annum will be due July 1 st not yet paid May 17 229 May 17 $490.00 136 Jan 1 $291.00 $1651 per annum overdue penalty owing of $165.00 October 3 90 Oct 3 $407.10 275 Jan 1 $1,408.90 (This may be reflected as a debit of $1,816 and a credit of $407.10) Last year's taxes were $1384. Purchaser's lawyer estimated a 17% increase. Taxes will be due July 1 st. April 14 262 Apr 14 $1,162.33 103 Jan 1 $456.95
19.8 Real Estate Trading Services Licensing Course Workbook ASSIGNMENT 19 CHAPTER 24: STATEMENTS OF ADJUSTMENTS Note: Unless stated otherwise, for statement of adjustments questions, you should assume that it is NOT a leap year and calculate taxes (including the property transfer tax) without taking into consideration home owner grants and other exemptions. Marks: 1 mark per question. 1. Which of the following statements regarding home owner grants is FALSE? (1) Where the tax due date falls before the adjustment date, the actual taxes paid will be the figure adjusted. (2) Where the tax due date falls after the adjustment date and either the vendor or purchaser or both are not eligible for a grant, then the gross taxes should be adjusted. (3) Where the tax due date falls before the adjustment date and both the vendor and purchaser are eligible for the basic grant, but one or both are not eligible for the seniors grant, the gross taxes should be adjusted. (4) Where the tax due date falls after the adjustment date and both the vendor and purchaser are eligible for the seniors grant, the taxes net of the seniors grant should be adjusted. THE NEXT FIVE (5) QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION: Ernie and Bert have entered into a contract of purchase and sale whereby Bert will buy Ernie's home for $600,000. Because Ernie and Bert are old friends, Ernie has agreed to lend $200,000 to Bert through a take-back mortgage. Bert has already paid a deposit of $50,000 to Ernie directly. The house is currently being rented to a tenant, Grover, for $900 a month, payable in advance on the first of each month. Property taxes on the house were due July 1 in the amount of $3,500, but Ernie has neglected to pay them; as a result, there is now an additional $250 owing as a late payment penalty. These taxes and penalty will be paid by the conveyancer upon completion. Conveyancing fees amount to $2,000. Real estate commission, in the amount of 4%, is payable. Property transfer tax will be payable upon completion. As of the adjustment date, September 15, Grover's security deposit plus accrued interest amounts to $1,050. It is not a leap year. 2. Which of the following represents the cash proceeds as shown on Ernie's statement of adjustments? (1) $322,005.62 (2) $321,755.62 (3) $322,805.62 (4) $321,746.03 3. Which of the following represents the balance due to complete as shown on Bert's statement of adjustments? (1) $362,555.62 (2) $351,505.62 (3) $361,496.03 (4) $361,505.62 Assignment 19 continues on next page
Lesson 19 19.9 4. Which of the following would appear as DEBITS on Bert's statement of adjustments? (1) Purchase price, Bert's share of property taxes, the take-back mortgage, conveyancing fees. (2) Deposit, conveyancing fees, Grover s security deposit plus interest. (3) Bert's share of property taxes, property transfer tax, conveyancing fees. (4) Conveyancing fees, purchase price, real estate commission. 5. The rental adjustment will appear on Bert's statement of adjustments as: (1) a debit of $450.00. (2) a credit of $450.00. (3) a credit of $480.00. (4) a debit of $480.00. 6. Bert's share of the unpaid house taxes would appear as: (1) a credit of $1,026.03. (2) a debit of $1,035.62. (3) a debit of $1,026.03. (4) a debit of $1,285.62. THE NEXT FOUR (4) QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION: Dale is a 67 year-old homeowner who recently sold his house to Penelope for $875,000. Upon closing, Dale plans to pay off the outstanding first mortgage of $150,000 with the proceeds from the sale. Penelope will assume the second mortgage of $74,000 and has paid a deposit directly to Dale in the amount of $75,000. Taxes on the house are $2,760.00 and are not yet due and have not yet been paid. As no exemptions apply to this transaction, Penelope will pay the property transfer tax upon closing. Legal fees to effect the transfer and to assume the mortgage are $600.00. The real estate commission is 4% of the first $100,000 and 1% on the remaining amount. The completion, possession and adjustment date is May 15. Draft the necessary statements of adjustments to answer the following questions: 7. Which of the following represents the cash proceeds of sale, as shown on Dale's statement of adjustments? (1) $586,750.00 (2) $563,229.18 (3) $565,270.74 (4) $563,236.74 8. The adjustment for property taxes appears on Penelope's statement of adjustments as: (1) a credit of $1,013.26. (2) a debit of $1,028.39. (3) a debit of $1,020.82. (4) a credit of $1,028.39. Assignment 19 continues on next page
19.10 Real Estate Trading Services Licensing Course Workbook 9. The real estate commission appears as: (1) a debit of $11,750 on Dale's statement. (2) a debit of $11,750 on Penelope's statement. (3) a debit of $12,750 on Dale's statement. (4) a credit of $35,000 on Dale's statement. 10. Which of the following represents the balance due to complete as shown on Penelope's statement of adjustments? (1) $667,078.18 (2) $741,079.18 (3) $741,086.74 (4) $745,080.18 THE NEXT FIVE (5) QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION: Peggy is purchasing Victor's Shaugnessy home for $675,000. Victor has agreed to finance $100,000 of the purchase price, secured by a vendor take-back mortgage. Peggy is also assuming Victor's existing mortgage in the amount of $200,000. Peggy has given a $40,000 deposit to the selling licensee. Real estate commission is payable on the sale at 6% on the first $100,000, and 2% on the remainder of the purchase price. Conveyancing fees are $2,000. Property taxes have been paid in the amount of $1,700. The adjustment and completion date is June 1. As no exemptions apply, property transfer tax is payable upon completion. It is not a leap year. Draft a statement of adjustments for Peggy and for Victor to answer the following questions. 11. The balance due to complete is: (1) $389,496.71. (2) $349,496.71. (3) $337,996.71. (4) $358,496.71. 12. The cash proceeds of sale total: (1) $358,492.05. (2) $375,996.71. (3) $318,496.71. (4) $358,496.71. 13. The deposit paid by Peggy represents: (1) a credit to the buyer, and a debit to the seller. (2) a debit to the buyer, and a credit to the seller. (3) a credit to the buyer, and does not appear on the seller's statement. (4) a credit to the seller, and does not appear on the buyer's statement. Assignment 19 continues on next page
Lesson 19 19.11 14. Property taxes are treated on the statements as: (1) a debit of $996.71 to Victor. (2) a debit of $996.71 to Peggy. (3) a credit of $992.05 to Victor. (4) a credit of $996.71 to Peggy. 15. The real estate commission: (1) is for $13,500 and appears on the seller's debit column. (2) is for $40,500 and appears on the seller's credit column. (3) is for $17,500 and appears on the buyer's debit column. (4) is for $17,500 and appears on the seller's debit column. THE NEXT FOUR (4) QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION: Sale Price $ 600,000 Assumption of 1st mortgage $ 260,000 Mortgage-back to vendor $ 100,000 Commission $ 20,000 Fees for assumption of 1st mortgage $ 350 Conveyancing fees $ 1,200 Purchaser's share of taxes already paid $ 210 Sailboat taken in trade $ 15,000 Deposit paid directly to vendor $ 75,000 Total taxes for the year $ 2,555 Property transfer tax $ 10,000 Balance due to complete? 16. What is the balance due to complete? (1) $161,410 (2) $160,560 (3) $161,760 (4) $161,550 Assignment 19 continues on next page
19.12 Real Estate Trading Services Licensing Course Workbook 17. What is the adjustment date? (1) January 31 (2) January 30 (3) December 1 (4) December 2 18. What is the total of the CREDITS on the purchaser's statement exclusive of the balance due to complete? (1) $435,000 (2) $450,000 (3) $350,000 (4) $375,000 19. What is the total of the DEBITS on the purchaser's statement? (1) $611,760 (2) $601,760 (3) $610,210 (4) $611,410 20. Which of the following would appear as a DEBIT on the purchaser's statement of adjustments? (1) Real estate commission (2) Legal fees for discharging an existing mortgage (3) Deposit paid directly to vendor by purchaser (4) Legal fees for preparing the transfer documents End of Assignment 19