Financial literacy month in Canada has just finished, but it’s never too late to make sure you understand the costs involved with buying a home!
You’ll encounter three categories of expenses: pre-closing costs, closing costs and after-closing costs.
A home inspection isn’t mandatory, but it’s money well-spent in the pre-closing phase. Getting a home inspection from a qualified home inspector, engineer or contractor can often help you avoid major, expensive problems later.
Before they provide financing, your mortgage lender might require you to pay for an appraisal or survey of the property to confirm the value of the home. I recently went through this process myself. It was somewhat unexpected, so it’s important to be aware that it could happen.
It’s also a good idea to involve a real estate lawyer early, particularly if you are buying a newly constructed home. A lawyer can review the agreement of purchase and sale before you sign it to identify unexpected costs that you will have to pay to the builder. These may include development fees, extra funds for a condo’s reserve fund etc.
Closing costs typically make up the biggest chunk of the additional buying expenses. In Ontario the land transfer tax applies at up to 2 per cent of the purchase price and in Toronto an additional land transfer tax of up to 2 per cent applies as well.
You’ll also need to pay legal fees to handle the various documents and contracts. Your lawyer will also do a title search on the home to ensure the seller can actually sell the home and there are no liens against it, and they will register the deed and the mortgage for you.
And depending on how property tax, utility payments and condo maintenance fees are scheduled, you may need to refund the seller for fees they have paid in advance.
There are three different insurance policies related to closing expenses. You will need to obtain home insurance before the lender will release the funds. You may want to get title insurance to protect yourself against title fraud, errors in surveys and encroachment issues with neighbours.
If your mortgage down payment is less that 20 per cent of the sale price, you’ll need to buy mortgage insurance as well.
There are a number of additional costs you could face if you’re buying a newly constructed home. First, it will be subject to HST of 13 per cent. Although you might be eligible for rebates from the Ontario and federal governments, you need to pay it up front.
New homes are covered by a warranty program administered by Tarion. Sometimes the Tarion enrollment fee is included in the purchase price, but other times it is due at closing.
On top of that, for newly built condos, you might end up paying “phantom rent” during the period after you’ve moved in, but before the condo is registered and handed over to the condo corporation. Again, something I experienced with the purchase of my first home. It took some explaining for me to understand this at the time.
The after-closing costs include moving costs, utility hook-up fees, renovations and repairs, as well as any new decorating, appliances and so forth. If the property has an oil tank, the seller usually has to fill the tank, and the buyer may have to pay a pro-rated amount for the oil that the seller didn’t consume.
This list is not exhaustive but it covers the most common expenses you might pay. By understanding the likely costs beforehand you’ll be better prepared to budget for buying your home.
RECO has created a special online guide that talks about the unique issues faced by first-time home buyers. You can find it at reco.on.ca/firsttimebuyer.
By Joe Richer – Registrar of the Real Estate Council of Ontario.
A condominium is like a small town. It has a board of directors made up of its residents much like a local council, and it has rules, restrictions, bylaws and even fines for misbehaviour. The condo across the street may look the same, but it may be a completely different community. That’s why it pays to keep handful of things to keep in mind when it comes to finding the right unit for you.
- The 3P’s – Pets, People and Parking
Many condos prohibit or restrict pets from dogs and cats, to goldfish and snakes. There may also be rules restricting the number of people that can occupy a unit, whether you can barbecue on the balcony or put a satellite dish on the outside wall. Other restrictions may include the time of day when you can play musical instruments, use the pool or the party room. There may be further restrictions about renting your unit. Your parking spot may be owned by you or owned by the condominium, and this will affect whether you can sell your parking space or be able to buy one from another unit for a second car.
- Reserve Fund
How much money is in the reserve fund and how much is needed? The board must make sure that the common condo elements, including the lobby, hallways, elevators, furnace, roof and parking garage are always maintained and repaired. This means conducting reserve fund studies. Ontario’s Harmonized Sales Tax (HST) adds approximately 4 per cent to a condo’s annual expenses because items such as utilities, security, landscaping and snow removal are taxed. So common condo expenses will rise going forward. If the condo’s reserve fund isn’t topped up it could lead to costly special assessments in the future. If there is no reserve fund study done, be very wary of buying.
- Professional management
Most condo directors do not have the business, legal or people skills required to manage their building. They are responsible for a budget that could be in the millions and must also deal with disputes between owners and the condo corporation. They also require a working understanding of the Provincial Condominium legislation that governs their condo. Even a relatively simple decision such as when to turn on the air conditioning requires someone who understands how the system works, as the decision will affect unit owners in different ways, depending on whether they are on the sunny or shady side of the building. That’s why a property manager helps. This person can offer advice and help solve problems among unit owners.
- Insurance deductible
If your building insurance policy contains a $5,000 or $10,000 deductible, then be sure to speak to an insurance specialist about obtaining your own unit coverage to protect your contents and any improvements that you make to your unit.
- Were alterations legal?
If any alterations were made – check to make sure that any necessary approval was obtained by the condo board, so you do not have to go through the cost of getting approved – which could require further inspection and certification by plumbers, architects or engineers.
- Do the owners get along?
Knock on some doors before you buy and ask people about the building. Also have a look at the minutes of the last annual meeting. Was it orderly or were many items disputed? You can tell a lot about whether owners get along as a group by what takes place at the annual meeting. Be suspicious if there has not been a meeting in over a year.
- Status Certificate
The status certificate issued by each condo should provide an up to date copy of all important condominium documents, the budget, the last annual meeting, whether there are arrears of common expenses, special assessments being considered and whether or not there has been a Reserve Fund Study. Your purchase agreement must be conditional on your being satisfied with the contents of this important document. Review this carefully with your real estate salesperson and your lawyer. Before deciding on which condominium you would like to live in, ask the right questions in advance and you won’t be hit with unwelcome surprises after you move in.
Tip Box – 7 Steps
- Check out all condominium restrictions – People, Pets and Parking
- Is the building professionally managed – if not – be careful
- Is there a reserve fund study? – if not – be very careful
- Is there an insurance deductible? – if so, you need to obtain your own personal policy
- Have any alterations to the unit been properly approved?
- Do the owners get along? – speak to people in the building and ask for minutes of the last annual meeting
Make any deal conditional on being satisfied with the Status Certificate.
Mark’s Contact Information
Mark Weisleder is a Partner, author and speaker at the law firm Real Estate Lawyers.ca LLP. Contact him at email@example.com or 1.888.876.5529
With my partners at Real Estate Lawyers.ca LLP, I am now able to close real estate transactions all across Ontario with our 29 Offices & Free Mobile Signing Service and I appreciate your trust in referring your clients to me.
If you have any stories to share about the housing market or just need some advice, please contact me at firstname.lastname@example.org