Adjustments
Definition and meaning of Adjustments in real estate.
Adjustments are the prorated financial costs and credits divided between a buyer and a seller at the closing of a real estate transaction. These calculations ensure that each party only pays for property-related expenses during the exact period they own the home.
In more detail
Common items that require adjustments include property taxes, homeowners association fees, municipal water bills, and prepaid fuel oil. If a seller has already paid an annual property tax bill in advance, they will receive a credit at closing for the days they no longer own the home, while the buyer is charged a corresponding debit.
Conversely, if expenses are paid in arrears, the seller will be debited for the days they occupied the home, and the buyer will receive a credit. These calculations are detailed on the closing disclosure, which is the official statement summarizing all transaction costs. Escrow agents or title companies are responsible for calculating these amounts.
Key facts
| Category | Legal, Titles & Closing |
|---|---|
| Also known as | Prorations |
| Who calculates | Closing agents or title companies |
| Typical timing | Calculated on the day of closing |
At closing, a seller receives a prorated credit because they had already prepaid the homeowners association fees for the remainder of the calendar year.
Frequently asked questions
What is the difference between a credit and a debit in adjustments?
A credit is money owed to a party, which reduces the cash they need to bring or increases their payout, while a debit is a charge that increases the cash needed or reduces the payout.
How are property taxes prorated at closing?
Taxes are divided based on the number of days the seller owned the home versus the number of days the buyer will own it during the current tax billing cycle.