Understanding Settlement Statement
The settlement day is an exciting milestone for property buyers and sellers alike. It’s the day when buyers finally receive the keys to their new property and sellers collect the final payment. But behind the scenes, there’s much more that goes into the property settlement process. Here, we break down what settlement involves, what you need to know about Settlement Statements, and how adjustments are calculated to ensure a smooth transaction.
What is a Settlement?
Settlement in real estate marks the official transfer of land ownership from the seller to the buyer. On settlement day, a series of tasks are carried out to conclude the property transaction:
Key Steps on Settlement Day:
- Final Property Inspection: The buyer inspects the property one last time to confirm it meets their expectations.
- Signing of Transfer Documents: Both parties sign documents to finalize the transfer of ownership.
- Registration with the Land Titles Office: The transfer is registered, formalizing the buyer’s new ownership.
- Statement of Adjustment and Settlement Statement Completion: These documents detail payments, adjustments, and the final amounts owed.
- SRO Duties Form: Any necessary duties or tax forms are completed.
- Final Payment: The remaining balance is transferred to the seller.
- Mortgage Settlement Finalization: The buyer’s mortgage is finalized, securing their financing.
- Key Handover: The seller hands over the keys to the buyer, marking the transaction’s completion.
Each of these steps plays an essential role in ensuring a seamless transition of ownership and protecting both parties from post-settlement issues.
What is a Settlement Statement?
A Settlement Statement (or closing statement) is a critical document that outlines the buyer’s final payment to the seller. Prepared by the conveyancer or property lawyer, this statement itemizes all expenses and receipts tied to the transaction, including:
- Stamp Duty
- First Home Owner Grant (if applicable)
- Statement of Adjustments — reflecting expenses like municipal rates, land tax, and any rental income adjustments.
Typically, the Settlement Statement and Statement of Adjustments are combined, ensuring that both the buyer and seller only pay and receive their fair share of expenses and income. These expenses can include:
- Municipal Rates: Adjusted up to the settlement day, with rates ideally paid in full beforehand.
- Water and Sewerage Charges: Based on daily charges, not actual consumption, these are calculated up to the settlement date.
- Rent (if applicable): Rent adjustments apply if tenants are in place, transitioning responsibility to the buyer post-settlement.
- Security Bond: Any tenant bond is adjusted so that the buyer receives the full benefit.
- Land Tax: In Victoria, land tax is assessed on December 31 each year. The buyer may owe the seller for tax liabilities from the settlement date until year-end if the property will be their principal residence.
- Owners Corporation Fees: Adjusted based on billing frequency (monthly, quarterly, or annually) for applicable properties.
Electricity and gas are generally not included in the Statement of Adjustments. Instead, sellers usually close their accounts on the settlement date, and it’s up to the buyer to set up new accounts.
Why Settlement Adjustments Matter
Settlement adjustments ensure both the buyer and seller only pay for their fair share of property expenses. Since settlement often doesn’t align perfectly with monthly or annual billing cycles, adjustments for expenses like taxes, municipal rates, and utilities ensure equitable distribution.
If settlement is delayed, the Statement of Adjustments will need recalculating. In cases where delays are caused by the buyer, the seller may be entitled to claim penalty interest or rental compensation from the buyer for the inconvenience.
