The most exciting part of any property purchase is the date of payment. This is the day when the buyer finally gets the keys to his new property and the sellers are paid the remaining amount. But there is more to the property settlement process than meets the eye.
What is a settlement Statement?
Payment for real estate occurs when the land is transferred to a buyer. The settlement date usually indicates the end of the transaction. In addition to providing the keys, there are several things that happen on the day of payment which includes:
- Final property inspection to confirm that this is what the buyer expects
- Both parties signed transfer documents
- The transfer of ownership is registered with the land titles office
- Statement of adjustment and settlement statement is Completed
- The SRO duty form has been completed
- The final payment is transferred to the seller
- Payment of loans is finalized
- The seller gives you the keys
Each of these steps is important to ensure that you do not have any after settlement problems.
What is a Settlement Statement?
A settlement Statement or closing statement is a document that sets out what the buyer must pay the seller on the date of payment. Includes all payments and receipts related to payment. This may include stamp duty, First Homeowner Grant, and Adjustment Statement. Includes the total purchase price for any deposit paid. The Settlement Statement is usually compiled by your real estate attorney when they are preparing to pay for the purchase of the property.
Settlement Statements are usually included in the Adjustment Statement because income and expenses related to the asset also need to be resolved between the parties. These costs may include such things as municipal taxes, property taxes and other temporary costs associated with the property. Income can include things like rent if the property has tenants.
Typically, a payment link will include income or periodic payments. That means they are paid or received weekly, monthly, or yearly. The seller must pay this amount and may receive the proceeds from the date of payment. After that, it becomes the buyer’s responsibility. Because payment does not usually occur at the end of the year or month, adjustments should be made to ensure that the buyer and seller only pay (and receive) their fair share. If for some reason payment date is delayed, changes will need to be recalculated. If the delay is caused by the buyer, the seller may incur a penalty interest or claim rent from the buyer.
What do we include in the Adjustment Statement?
If you are using a standard contract form in Victoria under the Estate Agents (Contracts) Regulations 2008, how certain adjustments are made is described in General Condition 15. If you have had your contract drafted by a property lawyer, then it’s important to make sure that they’ve included how expenses and income will be adjusted between the buyer and seller.
There are several factors that can be included in the Adjustment Statement and how the calculation of payment adjustments can vary depending on the cost. Some of the most common ones include:
Municipal Rates: The seller is responsible for paying rates up to the date of payment. Price adjustment is a very simple calculation in some properties but can be difficult if the property is part of a larger piece of land, such as a subdivision. How the prices will be adjusted in this case will depend on the contract, the type of subdivision and the amount already paid. Ideally, prices will be paid in full before the payment date rather than individual buyers facing a portion of it.
Water and sewerage charges: These are adjusted according to the number of days, rather than the amount of water used, up to the date of payment. Because the water meter is usually read quarterly, the Adjustment Statement may use the average retail expenditure to estimate the amount of water and sanitation costs that a seller must pay.
Rent: If the property is leased and the tenant has paid until the payment date then there will be no adjustments. After the payment date, the buyer will receive the rent directly from the tenant. If the tenant owes money to the seller on the date of payment, then there will be no adjustment. The seller may ask the employer for rent.
Security: If the tenant has paid a security deposit, this should also be included in the adjustment. If for some reason the bond is not paid or another is used, the seller may need to make a change for the buyer to reap the full value of the bond.
Land Tax: In Victoria, property taxes are levied by the owner on December 31 of each year. Land tax adjustments where you live in Victoria can be a little complicated. The level of property tax depends on how many properties the seller owns and the land tax liability for their properties. If the property will be the main residential area of the buyer, it will be exempt from land tax. However, the buyer may only request this exemption for the next calendar year, so he will still have to pay the seller’s land tax from the date of payment until 31 December of that year.
Owners’ corporation charges: Whether these fees are charged monthly, quarterly or annually, they must be adjusted in the Statement of Adjustment. The only payments that do not need to be adjusted are the cost of a single payment such as repair to the property.
The Adjustment Statement generally does not include electrical and gas repairs. Instead, the seller usually cancels his or her power account on the payment date and it is up to the buyer to open his or her account.
The Adjustment Statement will be calculated considering all costs incurred. If they have not already done so, then they will be paid out of the total money that is to be paid to the seller. This means that the seller will effectively pay them up to settlement date. Sometimes this involves having a bank cheque for settlement drawn up so that these expenses can be paid.
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