Rachel in Condos, HomeBuying, Legal, Money
Nothing sends clients reeling like the statement of adjustments on a new condominium closing, except, perhaps the statement of adjustments on a new house closing. The Homebuyer that decides to buy resale has fewer surprises to concern themselves with then the HomeBuyer who buys from a builder. This is the case because where a transaction involves a home that is built from scratch, there are many costs to the builder that are passed on to the purchaser that are not present when the transaction involves a resale home. Uncapped, these costs can soar above and beyond what many purchasers anticipate. No one wants their dream condo at $350,000 turning into a nightmare at $400,000.
For the first time HomeBuyer, the reference to a statement of adjustments may be completely foreign and seem like it would most logically be an itemized list of chiropractic treatments. The first thing to know is that the closing of any real estate transaction is usually not as straightforward as the exchange of the agreed upon purchase price for a set of keys thank-you-very-much-goodbye. There are items that need to be adjusted between the parties in order to ensure that the transaction is fair. As an example: Sam agrees to sell her house to Jack and the deal is closing in July. Sam, because she is very diligent, has already pre-paid the property taxes for the whole year. If nothing further happened, Jack would have the benefit of his property taxes paid for the rest of the year. This wouldn’t be fair to Sam, so on closing, they will adjust the amount that is due to reflect the fact that Jack owes Sam the money for the taxes that were already paid and this will show as a credit to Sam on the statement of adjustments.
Where the transaction is for a new condo or house, the statement of adjustments is far more complex and lengthy because the vendor is going to recoup, among other things, some of the money that was paid out in order to get the project going. This will include amounts for water meter connections, tree planting, the vendor’s legal fees, and municipal charges - this is not an exhaustive list, but meant rather to highlight the varied and many ways the builder will attempt to recoup its costs. Additionally, the cost of any upgrades that you ordered, such as the granite countertops and satin nickel finish fixtures will typically be adjusted for at the end.
In terms of the costs of the builder, they will be unknown at the time you sign the agreement. The best you can do is try to negotiate the ‘capping’ of these costs - you will negotiate these terms during your 10-day rescission period. This is the period of time in which you can walk away from the deal and get your deposit back from the builder. Make sure that everything is signed by the developer – not the sales office – before your 10-day period expires. If negotiations are ongoing, ask for an extension in time (again, from the developer, not the sales office). If the builder is unwilling to cap at least some of the costs, you may want to consider walking away – I say this because if money was no object, you probably wouldn’t be reading this post in the first place. Some builders incorporate ‘capping’ provisions into the terms of the agreement at the outset – it demonstrates an understanding that most consumers are going to try to negotiate a limit to these unknown amounts and avoids time-wasting haggling over these provisions Please note that the 10-day recission period is only avaiable to new condo purchasers - if you are buying a new home, make sure you negoitiate at least 7-10 days before the deal is firm to be able to review your contract.
Final tips for avoiding sticker shock:
1) Keep your spending on upgrades under control;
2) Negotiate an upper limit to the amount the builder will assign to you on closing;
3) Understand that, as discussed in my previous post, the interim occupancy period in no way contributes towards the purchase price of your home;
4) Become comfortable with the fact that your new home/condo will likely cost you anywhere from $3,000 to $12,000 above the price listed on the agreement and adjust your lifestyle and financing accordingly.
Rachel Loizos is an associate lawyer at Sotos LLP in Toronto. She practices in the area of real estate law.
