BUYING a property is a big event and you will want to approach it with confidence. I produced “A Buyer’s Guide” because I realized that many buyers enter into a real estate transaction with very limited knowledge and I wanted to help my buyers feel more comfortable and secure when purchasing a property. This booklet takes you through the buying process from the moment you make the decision to buy right through to the closing and possession date. It explains types of ownership, financing, closing costs, mortgage terminology, paying a “fair price” and preparing an offer. I hope you find this booklet useful. I recommend you take the time to read through it and make a note of any questions that you may have. Then you’re ready to take the next step.
SELECTING a real estate salesperson to work for you is an important part of the buying process. A good Realtor will save you time and money. He/she will answer your questions and help you understand each step of the transaction. You will find it much easier to plan an effective buying strategy and arrive at a well informed decision if you have a knowledgeable and experienced professional with which to consult.
TAKE the time to arrange a meeting to discuss your needs with a Realtor before you start looking at property. Go over all your needs, your financial capabilities and any special requirements the property must satisfy. Be honest. Your Realtor will be able to select for your viewing those properties which are most suitable to the needs you have described. And remember, you should feel comfortable and confident in the Realtor you are working with.
If you don’t – find another Realtor.
TYPES OF PROPERTY OWNERSHIP
What is Real Estate?
REAL ESTATE is a unique commodity. While it takes many forms (from bare land to high-rise condominiums, single family homes to commercial shopping plazas), one feature remains constant. It cannot be moved!
REAL ESTATE makes each property different, from one area to another. That is why location can affect the value of real estate so dramatically, even though the buildings on it may be very similar.
Usually when we think about real estate, we mean a piece of land with a building or a house on it. Freehold ownership is acquiring the exclusive right to the use of the property by purchasing the title. The title may be encumbered by charges against the property and some of these will be discussed later.
Condominium ownership is an alternate form of home ownership which has become very popular. An owner of a condominium acquires the exclusive use of a specific space, usually defined as the interior of a dwelling, plus a share of the common area and land held by the condominium corporation.
The owners of all the units form a condominium association and elect a Board of Directors who will ensure that the management and financial requirements of the corporation are met. The cost of maintenance of the common areas is paid for by the fees assessed to each owner. Condo fees also generally pay for the fire and liability insurance for the buildings, management fees, maintenance of grounds and landscaping as well as repairs to the exterior of the buildings. Some condos have recreational facilities which are also maintained through the fees.
OCCASIONALLY you may encounter residential property available on a leasehold basis, (although this is usually more common with commercial property). The major difference to note is that what you own is the “lease” or “right to use” for a specified period of time. Although you own the building or improvements, you do not gain title to the land itself and in many cases you ultimately lose the buildings and improvements with the expiration of the lease period.
CHOOSING A NEW OR RESALE HOME
One of your buying choices may be deciding between the purchase of a new home versus a resale home (a house which has been previously occupied.) Sometimes this choice is made easy based on your neighbourhood preferences and/or time constraints. If you can’t wait the time period required to have a new home built, then the closest you may come to a new home is to choose a “young” resale home.
New homes offer a special appeal to some buyers. You have the opportunity to experience the adventure of building. You have your choice of colours and floor coverings and perhaps even the plans and specifications. New homes & condos in Alberta must offer buyers a warranty. A well built new home can mean fewer maintenance expenditures for many years.
A RESALE home offers the distinct advantage of letting you see what you are buying – exactly as it is, ready to occupy and enjoy. Often times the previous owner has made substantial improvements such as landscaping, fencing, additional shelving or storage and/or some basement development. Occasionally the price may include some of the appliances, draperies, or other added built-ins which can increase your enjoyment of the property without hitting you in the pocketbook.
The age of the home is often not as important as the overall condition of the property. Normally the condition is evident from the general maintenance and look of the property. If there are any doubts whatsoever, it is always a good idea to have the property professionally inspected and have this form a condition on your offer.
GST: How will it affect your home purchase?
GST on existing housing?
Generally speaking, you won’t pay the Goods and Services Tax (GST) on resale housing (including single or semi-detached homes, row houses and condominiums), unless the home has been substantially renovated.
Further, you won’t be charged GST on loans, mortgages or home insurance policies.
The GST and new housing
GST is applicable (at the rate of 5 percent of the selling price) to newly-constructed housing and substantially-renovated housing (when structural changes that are both major and comprehensive are made). A builder’s rebate, however, can lower the actual GST to be paid.
Most qualify for GST housing rebate
More than 95 percent of all new home-buyers qualify for the GST housing rebate. Anyone buying a principal residence worth up to $450,000 — whether they purchase a single-detached or semi-detached home, row house or condominium — will receive the GST builders rebate.
DEFINING YOUR NEEDS
It is much more difficult to find the “right” home if you have not established your buying restrictions based on your needs, wants, and finances. Not everyone buys a mansion the first time around!
The usual pattern of ownership appears to be a starter home the first time with one or more upgrades to a larger or more luxurious home later, when finances and needs change and permit a greater investment. A good way to start is to prepare a list of features you need and want in your home. Take a piece of paper and divide it into two columns, one marked “MUST HAVE” and the other “WISH LIST”. By taking the time to organize your needs and wants into the appropriate column, you will have a much clearer idea of what your “right” home will be.
Make the MUST HAVE list a very realistic and limited one based on your family’s actual needs. If each member of the family needs a separate bedroom, obviously the total number of bedrooms becomes a MUST HAVE item. For many people a guest room becomes a WISH LIST item. If you have decided that you must have a fireplace and you will not consider a property unless there is one, then this feature should go under the MUST HAVE column. If however, you want a fireplace but would consider having one installed at a later date if the house met your needs in other ways, then put the fireplace under the WISH LIST column.
WHAT CAN YOU AFFORD TO BUY?
The price range of a home you will be able to afford depends on a number of factors:
1. The available cash or down payment.
2. Estimated closing costs.
3. Monthly payments you can afford to carry.
4. Amount of mortgage financing you can qualify for.
These factors will be discussed individually, but first you should be aware of some of the ways you may purchase a property as well as the terminology used by financial institutions.
MORTGAGE: money borrowed to purchase a property in which the debt is secured by a charge against the title of the property.
MORTGAGEE: the lender.
MORTGAGOR: the borrower.
PRINCIPAL: the amount of money to be borrowed.
AMORTIZATION: the total time period over which the debt will completely repaid. Most new mortgages are amortized over 25 years. The amortization schedule is the series of payments calculated to retire the debt. The payments are usually equalized monthly or occasionally, weekly.
TERM: the length of time the loan is in effect at the interest rate and payment schedule specified. The term can vary from 6 months to 10 years.
MATURITY DATE: the final day of the term at which any unpaid balance of the mortgage becomes due and payable to the mortgagee Frequently the mortgage is renewed or refinanced on that date.
DOWNPAYMENT: the cash investment being made toward the purchase price by the purchaser.
PI MORTGAGE PAYMENT:
the monthly payment of interest and principal.
PIT MORTGAGE PAYMENT:
the monthly payment of interest, principal and 1/12 of the annual taxes. (The tax portion is commonly kept in a tax account by the mortgage company and annual taxes due are paid out of this account).
WAYS TO PURCHASE
CASH TO MORTGAGE:
The purchaser puts a down payment on the property and assumes the existing financing.
The size of the down payment required is based on the difference between the sale price and the mortgage balance. This is an excellent way to purchase a home provided the existing mortgage meets the purchaser’s needs and the required down payment fits his pocketbook. It is important to remember that the new owner must still qualify for the mortgage with the lender.
LET’S TALK ABOUT LOW DOWNS:
So often I receive calls from purchasers who are looking for mortgages to assume with very low down payments. During the difficult economic times of 1983 to 1985, it was possible for a purchaser to buy a property with as low as a dollar down. All the seller wanted was to have someone else assume the liability for the outstanding mortgage.
Today this situation has changed dramatically. With an improved economic climate comes a rise in prices and therefore an increase in the amount of equity that an owner has in the property. Let’s look at an example. In 1985 property “A” has a mortgage of $70,000 at 13.5%, however the value of this property if no mortgage existed might only be $65,000. The owner, not wishing to continue to make payments on the mortgage, decides to sell the property and resells it to a purchaser for $71,000 with the purchaser paying $1,000 down and assuming the debt. Obviously the purchaser has paid $6,000 higher for this property than the true market value and has also assumed an unattractive mortgage.
Now assume that the seller kept the property and let’s look at the situation in 1987. Market conditions improved steadily and the owner’s mortgage came up for renewal in 1986. The interest rate was much lower and the owner renewed the loan at 11% so now his mortgage payments dropped. The market also had appreciated and the home achieved a value of $78,500 in 1987. Since the owner made payments for 2 years, his mortgage was now down to $68,000 instead of the $70,000 that it was in 1985. Now a purchaser would need $10,500 to assume the mortgage.
These examples illustrate why it is so difficult to find a low down payment situation in today’s market.
When a purchaser buys a property and takes out a mortgage for less than 80% of the total value of the property, this type of loan is commonly referred to as a conventional mortgage. Since the purchaser has invested 20% or more of the value of the property in his/her own funds, the financial institution feels secure that their loan is protected and usually will not require mortgage insurance (ie CMHC insurance). This results in a saving to the purchaser.
HIGH RATIO FINANCING:
When a purchaser does not have 20% of the value of the property to put down as a down payment, he/she needs to get a loan for a higher amount. Such loans are available and in fact are very common. The financial institution, however, insures the loan against potential losses should the mortgagor default on the mortgage.
Most loans which are insured are with either CMHC or Genworth Financial and the fee charged is based on how high the mortgage ratio is. The cost of mortgage insurance is usually added to the principal balance of the loan and becomes part of the mortgage amount which you will be repaying.
DO NOT confuse mortgage insurance with the actual fire and liability insurance for your home nor any life insurance policy you may be offered in conjunction with your mortgage application.
HOW MUCH MONEY CAN YOU BORROW?
Before a mortgagee will agree to lend you the money you need to purchase a home, they need to have certain information about you including:
1. How much of a down payment do you have to invest?
2. Where is your down payment coming from?
3. What is your total gross (before taxes) income?
4. What are your other debts?
5. Where and how long have you been employed?
6. Your credit rating.
7. Your other assets.
8. Your dependants.
REMEMBER, the lender needs this information to help him protect his investment in you, the same as you need all the information on buying your home to protect your own investment.
** Be sure to review the Mortgage Documentation Required Form **
HOW LARGE A MORTGAGE CAN YOU QUALIFY FOR?
Lenders use certain formulas to determine how much debt they feel you can afford to repay. Most lenders feel that you can afford to spend 32% of your gross monthly earnings on total monthly housing costs. These costs included the mortgage payment called the PI, and 1/12 of the annual taxes as well as estimated heating costs.
It is VITALLY important that you have met with a mortgage broker (or your bank) and have received a mortgage pre-approval prior to viewing properties. Your mortgage specialist can answer all your questions and will go over all the mortgage details and particulars with you.
HOW MUCH DOWN PAYMENT DO YOU NEED?
Your mortgage specialist will discuss your purchasing options with you when provided with details on:
1. Your total investment capital (money available to be used for down payment and closing costs).
2. Your total annual income from all sources.
3. Your outstanding debts and the payment schedules agreed to for repayment.
4. Any credit difficulties which might prevent you from being approved for a mortgage. (Previous foreclosure, failure to repay a loan, default on payments etc.)
Closing costs are dollars in addition to your down payment which must be paid to complete your purchase. True closing costs are those which appear on the Statement of Adjustments which your lawyer will prepare for you.
Shown in this statement will be:
A TAX ADJUSTMENT which is your share of the current year’s taxes.
DISBURSEMENTS which are specific charges incurred, including fees paid to the Land Titles Office to register the property in your name and to register a mortgage.
LEGAL FEES are commonly referred to as closing costs. Your lawyer will charge a fee to search the title and convey the title of the property to your name. You will also have legal fees for the preparation and placement of a mortgage. If you use the same lawyer for both conveyancing and placing the mortgage, you will usually save some legal costs.
There are some other costs that you should allow for. We discussed the mortgage insurance fees which you may be paying if your purchase is financed by high ratio financing. This fee is usually simply added to your mortgage principal so that you do not “see” it as a cost to close. Do make sure you have budgeted for the following additional items.
Fire and Liability Insurance – always required for mortgage purposes and important to protect your own investment in the property. If you are buying a condominium you will find that your condo fees will include fire and liability insurance. Remember to insure your belongings and contents which in the case of condominium blanket insurance, will not be covered.
Mortgage Arranging Fees – Financial institutions such as banks and trust companies sometimes require an appraisal to determine the lending value of the property you are purchasing.
Most mortgage companies will allow you to use your own lawyer to prepare the mortgage or will suggest one of their own preferred lawyers if you do not specify one.
WHAT ARE ENCUMBRANCES ON TITLE?
You should be aware of any charges against the title of the property you are considering purchasing. Usually these fall into two categories:
These are charges which can or will be removed from the title when you become the owner, provided your offer makes clear which encumbrances you are not willing to assume. These may be mortgage, liens or caveats. Most real estate contracts state that the vendor is responsible for discharging these encumbrances at their own expense.
There are occasionally certain types of encumbrances which are attached to the land and cannot be removed from title. Examples of these are easements, utility rights of way, restrictive covenants.
While these types of charges usually do not interfere with the owner’s right to use and enjoy his property, it is wise to be aware of what these are, in the event you have future plans for the use of the property which you may be prevented from engaging in. For example, an easement may prevent you from building a garage above it, requiring you to locate the garage on a different part of the property.
A utility right-of-way for a service such as an electrical cable would prevent you from building above it. Also, in the event the utility company needed to enter your property to repair or replace the cable, you must permit them access.
A restrictive covenant may detail the architectural guidelines for the area and set colour schemes and set-backs above the normal city by-laws. Other types of restrictive covenants specify that the property may not be used for certain types of activities such as parking recreational vehicles in the front drive.
Obviously it is a good idea to be aware of these encumbrances prior to finalizing your purchase.
MAKING AN OFFER (PURCHASE AGREEMENT)
Making an offer on a property is the first step in a legal contract to buy and should be reviewed carefully. The offer should contain in very clear terms everything that you intend to do, and should state exactly what you expect to receive from the seller in return.
** Be sure to read the ENTIRE contract prior to signing **
There are basically two types of offers and your offer should be written to reflect your circumstances and needs:
FIRM: This type of offer means that you are offering to buy the seller’s property at a set price with no conditions whatsoever in the offer. Should the seller accept your offer, you have a firm and binding agreement.
CONDITIONAL: This type of offer outlines what conditions must be met before the offer will become firm and binding. Conditions can allow a purchaser to obtain certain information or complete certain actions before buying the home. Examples of conditions are:
1. Conditional upon obtaining financing. (mortgage)
2. Conditional upon an acceptable property inspection.
3. Conditional upon the sale of another property.
4. Conditional upon examination of the title to ensure certain encumbrances will not prevent your using the property in a specific way.
Conditions should be used carefully in an agreement because they may be perceived to weaken your offer to a seller and may cause him to reject your offer if the conditions appear unreasonable or if there is a better offer.
IMPORTANT PARTS OF AN OFFER TO PURCHASE:
DEPOSIT – The amount of the deposit shows not only your good faith, but indicates to the seller that you are serious about purchasing the property. If you are putting an offer on a property that is listed with a real estate brokerage, the deposit will most likely be placed in their trust account – usually without interest. If your deposit is at least $5,000.00 and the time period it can be deposited for is greater than 45 days, you may request that it be placed in an interest bearing account with interest payable to you.
HOW PAYMENT IS TO BE MADE – The offer will detail what, if any, financing is to be assumed or arranged for, and if the latter, how long you have to do so.
ADDITIONAL CONDITIONS – Any special conditions which must be met before your offer to the seller can become firm should be detailed here along with a specified time period within which these conditions are to be fulfilled.
PURCHASE PRICE TO INCLUDE – List the items which you expect your purchase price to include. Often the seller will have indicated on his listing if he is planning to leave behind certain appliances, window coverings or other items. Purchase agreements usually state that all permanent fixtures (APF) are included. Generally a fixture is defined as any item that is permanently affixed to the property. It includes such items as light fixtures, built-in dishwasher, garborator, hoodfan and similar attachments. If you are in doubt, it is always best to specify.
OPEN FOR ACCEPTANCE BY THE SELLER – This is the time period which the seller has to accept to your offer. Failure to accept within the specified time period renders your offer void.
ADJUSTMENT DATE – This is the date which will be used to calculate the division of yours and the sellers share of costs such as annual taxes, mortgage payments, utility charges, rents, etc.
POSSESSION DATE – The time and date on which you will have the right to occupy the property. This date is often but not always the same as the adjustment date.
LOCAL IMPROVEMENTS – Many Calgary properties have been assessed a local improvements tax for some specific area or community improvement such as paving back lanes or supplying electrical services underground instead of overhead. If the local improvement tax is for the sole benefit of the property that you are purchasing, it becomes the sellers responsibility to discharge it. If however, it is a charge being shared by a number of homes, you will be assuming the Local Improvement Tax as part of your annual tax statement until it has been paid off.
RESIDENT STATUS DECLARATION – Most real estate contracts contain a clause whereby the seller must state that he/she is a resident of Canada within the meaning of Section 116 of the Income Tax Act of Canada. This is a very important clause since this Act places a burden of responsibility on the purchaser of a property to make reasonable inquiries to ensure that the seller is a “resident”. Failure to do so may result in the purchaser becoming liable for payment of the capital gains that a non-resident seller may be responsible for.
READ THE FINE PRINT – Ask your Realtor for a copy of a Purchase Contract and read it to be sure that when the time comes to fill it out you are comfortable with it. If you don’t understand certain clauses, be sure to discuss them with your Realtor for clarification. Buying a home is a big step for everyone and you will want to understand all of your obligations and rights.
WHAT HAPPENS BETWEEN OFFER AND
If you have made a “conditional offer”, you are obliged to take the necessary steps to attempt to fulfil the conditions. For example, if your offer is conditional upon obtaining mortgage financing, then you need to make application and go through the appropriate procedures to obtain that financing. When the conditions on your offer have been met, you must acknowledge this in writing. To “remove” a condition, your Realtor will have you sign a “notice” and then your offer to purchase becomes firm.
Once you have a firm contract your Realtor provides all parties to the contract with a copy. Your Realtor will also provide your lawyer with a copy of the contract as well as any related documents pertaining to the purchase agreement.
Your lawyer will take the legal steps required to complete the sale and transfer of the property to you. Among these steps are transferring the title to your name, preparing any necessary mortgage adjustments to taxes and other applicable charges according to your purchase agreement.
You will be required to attend at the lawyer’s office to sign documents in advance of possession. You will also be advised of the required cash to close and must provide this by certified cheque or bank draft payable to your lawyer in trust, in advance of the closing date. Your lawyer will transfer the balance of funds required to complete the purchase to the vendor’s lawyer in trust. Only after the funds have been received by the vendor’s lawyer will you receive permission to take possession of the property according to the time and date on your purchase agreement.
Contact the utility companies well in advance of your actual possession date so that all services you need will be operating on the day you take possession. Remember to call to arrange for gas, electric and water services to be transferred to your name on your effective adjustment (possession) date. You should also request telephone and cable TV/internet services well in advance to ensure you have them when you need them.
If you already own and have sold your existing home in conjunction with your new purchase (See “A SELLER’S GUIDE”) remember to coordinate the cancellation of services for this property with your purchaser to avoid future billing complications.
Try to allow yourself several days to make your move if at all possible. You will find your move will go more smoothly if you don’t have to be out of your present accommodations and into your new one all on the same day.
Send change of address cards to:
___ Post Office
___ Charge Accounts
Make arrangements with moving company.
Disconnect utilities, get refund for any deposits made, and advise where final bills are to be sent:
___ Cable TV
___ Civic Organizations
___ Auto Club
Notify Insurance Companies
___ Home Owners
___ Check with Insurance Agent on coverage of
Life, Car and Household goods en route to
___ Obtain School records for children
___ Obtain Birth and Baptismal records for all family members.
___ Obtain legal records
___ Check to see if your Will must be rewritten when moving across Provincial
Obtain Medical Records
___ General practitioner
___ Other doctors
___ Have drug prescriptions filled
___ Leave keys and any necessary legal papers with your lawyer.
Make Arrangements with Banks
___ Chequing accounts
___ Safety deposit box
Buyers Guide, guide, guide, guide, guide, guide
Buyers Guide, guide, guide, guide, guide, guide
Buyers Guide, guide, guide, guide, guide, guide
Buyers Guide, guide, guide, guide, guide, guide