This article is prepared to inform a first time home buyer on the most important questions which need to be acknowledged and answered to make a good decision and be successful in the home buying.
What it would cost to buy a home?
Let’s here discuss on various items that you would need to arrange as a home buyer to coordinate your home purchase.
Deposit – This is the amount that represents your good faith. When you like a property and offer is negotiated for amount, closing date and conditions, both you and seller agree on the amount; the deposit draft is submitted to show your good faith and interest in the deal. This amount will eventually be considered as part of your contribution towards the down payment of the property.
Land Transfer Tax – When the house is purchase and sale is closed by your lawyer; the land transfer tax needs to be paid to the government and this forms the biggest part of your closing costs. For more details of this calculation please refer to Understanding – Land Transfer Taxes.
Home Inspection – is a very important aspect of the home buying process; when your offer to purchase is accepted by the Seller and you have rightly made it conditional on an inspection. 3rd party inspectors will be hired to do due diligence on the physical aspects of the property to ensure we are not buying a lemon. This includes conditions of roof, attic, foundation, windows, furnace, air conditioner, appliances, etc. This step will ensure that you buy a good property and if some urgent work needs to be done you bring that back to the negotiation table with the sellers. You can refer to a detailed blog here on Home Inspections 101.
Home Insurance – This will need to be considered as a monthly payment to ensure the home to cover yourself from any untoward incidents and giving peace of mind.
Lawyers Fee – As part of the closing formalities lawyer will charge a fee and this would form part of closing costs.
Title Insurance – This is the insurance which your lawyer will secure at the time of purchase of the property on your behalf; this is to secure us for any Title related issues that are due to the actions of the previous owners.
Property Tax – These are the taxes that the municipality takes for the services provided and upkeep of the neighborhood and town, this provides us the schools, parks, roads, street lighting, snow removal, garbage collection and so on. The property tax is calculated by multiplying the assessed value of a home with the posted tax rate of the municipality for the year. You can refer in-depth details here at Understanding Your Property Taxes.
Arranging Movers – and expenses that relate to your moving from your old home to the new one need to be factored in for your smooth transition.
For all of these costs, you can refer to our article here on Understanding Your Closing Costs where these are discussed in detail.
What is Pre-Qualification?
Borrowing a Mortgage is one of the most important elements of the whole process of buying a home, both for investors as well as primary residence first-time homeowners. Knowing what we as a family can qualify for before starting the review process of screening homes puts you in the driving seat to know what best you can afford. Freezing your budget ensures that you are on top of the game for putting an offer with confidence and knowing well in advance your negotiation room. The process where the bank or financial institution qualifies you for the amount you can borrow is called the pre-approval process. There are various different types of mortgage options that are available from a different category of lenders. You can find an in-depth article on Understanding Mortgage Qualification.
How to Find the Right Property?
Now that we have our budget planned, mortgage pre-approved, let us discuss the things which we need to consider for screening an ownership or cashflow property. There are four most important things which we need to focus on when we buy a property and they are important in this order and all of these are of utmost significance in our home search process.
The Location determines the future potential and growth of your asset and plays biggest role in what returns we can expect on the home as the time progresses. The locations are better or worse compared to each other based on the various factors viz a viz transit options, schools, crime rate, recreation facilities, parks, house tax rates, insurance rates, hospital, and care facilities, past sales trending, upcoming development plans (if any), etc. Age comes in second when we think of the cost of ownership during the years and the growth which asset observes without the need of us spending money on it. Third comes the Property Type, there are a variety of various different property types and based on your exposure in investment, your budget and your primary needs you can select one. The final and important factor in home selection is the Layout of the property, as we can very economically replace the cosmetic aspects of a home (flooring, painting, fixtures, appliances) to make it look appealing, however, we can not do much to change the layout or dimensions of spaces without spending big dollars. That’s the reason we should be very diligent in ensuring we buy a functional property that will work for you as well as future prospects when the time comes to dispense it. You can find an in-depth explanation of these four parameters here: Four Pillars of Home Buying.
You can play with these four parameters and take them up or down based on the amount of budget you have set aside for your home purchase and keeping in mind your family priorities for the next five years.
If you are looking specifically for an investment property for rental revenue you will have some different objectives and here our article on How Income Properties Work will certainly be worth your time.
How to choose a Right Buyers Agent?
The cost of utilizing the service of a good broker is included in the market value of the home and paid by the sellers. So, at no extra cost, you get the benefit of an expert reviewing the home for location, specs, and future growth potential based on historical data. They take you through the entire process seamlessly as they have done it multiple times and mitigating all of the usual risk factors by incorporating appropriate checks in the whole process. Another important aspect of working with a good agent is the Negotiation advantage; as your motivation to buy and how greatly you like a property, what qualification you have remains close to him and never reaches the Sellers or their agent. This makes it easier to secure a property at a good price as our motivation, emotions, and details are not visible to the Sellers Agent.
Often I find there is a misconception when the Buyers think that let me speak to the listing agent and I might get a better price. There is a conflict of interest if Sellers agent is also acting on behalf of buyers as he is only dedicated to the Sellers and how he can act on our behalf to get us a good price and take care of our interest as buyers. This conflict of interest is called Multiple Representation and should be avoided by having our own buying representation for the screening, offer, and negotiation process.
Your agent will be able to critically review a home when you screen properties with him to make a better purchase decision versus talking to a Selling Broker who will have only good things to say about the property. When as Buyers we do the inspection and any major items which come up in the inspection, a good buyer broker will be able to skillfully bring back those items to the table for sellers to take care of them before closing or do a further adjustment in pricing to compensate for those. In the interviewing process with buyers agent you can ask them about their past body of work and client reviews, also ask them to explain the entire home buying process and you will come to know very easily on their strengths and whether they are the right fit for you.
What is the Offer Process?
When you find the right property which meets all your family needs and priorities; the next step would be for your Buyers Agent to do their research for past sales in the immediate neighborhood and come up with an analysis of the fair market value of the property in question. With this amount, you then agree on the offer amount and your negotiation strategy with your broker. Your agent then prepares a clean offer with the variables of amount, closing date, requisition date (Title Search Date), finance/inspection and other conditions you have on the purchase like the status review for condo purchases, etc. With these variables, the offer is negotiated and usually goes back and forth with the parties until they agree on these parameters.
Then starts your conditional period where essentially you work with your financial provider for securing mortgage approval against the property and with a certified inspector to get the Home Inspection done on the property. You can get more details on this process at Home Inspection 101. With inspection done if any major deficiencies are observed in the foundation, HVAC equipment, Attic, etc these are again negotiated by your broker as required to get an agreement with the Sellers Broker.
Is right now the best time to buy a home?
For homeownership specially in Canada where the economy is immigration based, the property prices have consistently grown over the years. So, if you are not doing a speculative buying and your goal is to avoid the monthly rental you will be fine in the long term. The investment will repay with appreciation in the asset and the monthly principal repayments which will increase your own equity in the investment. However, if you want to invest in real estate for short term gains you need to time the entry in the market for your purchase and observe the market trending very closely.
Once you are done with the purchase and if you are a first time home buyer, there are things which you need to take care and you can refer to our checklist at First Time Homeowners Reference.
We hope this was informative and do reach out to us if you have any clarifications and would be happy to discuss.
Team Ravi and Mudit