Definition of Adjustments

In real estate, adjustments refer to the prorated expenses that are divided between the buyer and seller at the time of closing. They ensure that both parties pay their fair share of costs, such as property taxes, utility bills, homeowners’ association fees, and other expenses, depending on the time each party has ownership of the property within the billing period.

Understanding Adjustments in Real Estate Transactions Through an Example

Consider this scenario to better understand ‘adjustments’: Let’s say a home is sold, and the transaction closes on the 15th of the month. The seller has already paid the property tax bill for the entire month. As the seller no longer owns the home from the 16th onward, they should receive a credit for the prorated portion of the property taxes from the 16th through the end of the month.

This credit is provided by the buyer, who will enjoy the benefits of the property tax payment for the remainder of the month after they take ownership. Such instances highlight the role of ‘adjustments’ in ensuring a fair transaction for both parties. These are usually detailed on the HUD-1 Settlement Statement (or equivalent closing statement) that both the buyer and the seller review and sign at closing, ensuring complete transparency about all costs, credits, and adjustments in the transaction.

Related Real Estate Terminology

1. Closing: The final step in executing a real estate transaction where the title is transferred from the seller to the buyer.
2. Proration: The act of dividing or allocating costs proportionately, based on ownership time during a billing period.
3. Escrow: A neutral third party or account that holds funds during the transaction process.
4. Property Taxes: Taxes assessed on real estate by the local government, usually paid annually.
5. Homeowners Association (HOA) Fees: Monthly or annual fees paid by homeowners within a particular community for shared services and amenities.
6. Settlement Statement: A document that summarizes all the fees and charges that a borrower and seller must pay during the settlement process.
7. Deed: A legal document that signifies ownership of a property.