Steps & Costs Related to a Home Purchase
The home-buying process can appear daunting the first time you experience it. There are a lot of steps and a lot of costs – not all of which are obvious – but it’s not difficult when you are prepared. Your REALTOR® will guide you through the process and explain it all, but here’s an overview of a typical sale:
1. Talk to a Mortgage Broker and get a pre-approved mortgage. This is an important first step; it will let you know exactly how much you can afford to spend (so you look only at homes that are practical for you at this time) and will ensure you can move quickly and decisively when you find the home you like.
2. Working with your REALTOR®, look at homes in your price range in the area you choose, and select the one you feel best suits you and your needs.
3. Write an Offer. The real estate agent will prepare the Offer on the standard “Contract of Purchase & Sale” form used in BC. The Offer will include:
- the price you are offering for the property
- the inclusions (window coverings, appliances, etc.) you wish to be included in the sale
- a list of “subject clauses” for your benefit; examples might be “Subject to a satisfactory home inspection”, “Subject to a bank appraisal satisfactory to your mortgage lender”, etc. (In most cases, your Lender will require an appraisal to ensure that they agree that the value of the property is sufficient to justify the size of the mortgage they will advance to you; your Mortgage Broker will know what the Lender’s requirements are.)
- the date of your possession of the property; try to arrange it so you “close” on a Tuesday, Wednesday or Thursday, and take possession two days later; account for legal holidays, you can’t close on weekends or statutory holidays
- a deposit amount. Generally, the deposit will be an amount in the range of 5% to10% of the value of the property you are purchasing, and will be due and payable as soon as your subjects are removed – usually within a week or so of your offer being accepted. The deposit is for the protection of the Seller in the event you default on the sale after all subjects are removed and the sale is firm. If you do complete as contracted, it forms part of your payment for the property. The deposit cheques are cashed and held in trust by the real estate broker. The deposit should not be more than the amount of your down payment.)
- for any sale involving a strata property there will be additional subject clauses included, covering your approval of the strata minutes, etc.
- a time period during which this Offer is “open for acceptance”; usually the offer is left open only for 24 hours or less.
4. Negotiate the Offer. When your Offer to Purchase is presented to the Seller, typically by your REALTOR®,, the Seller can accept it, reject it, or “counter” it. A Counter Offer will usually take the form of the Seller stroking out some terms on your Offer, initialling the changes, and returning it to you for action within a certain time period (the time period during which this Counter Offer is “open”.)
Now the ball is back in your court. You as the purchaser have the options to accept, reject or counter. This process repeats until Buyer and Seller agree to all the terms, or the deal collapses because you are unable to reach agreement.
5. Subject removal. Once you have an accepted offer, you must arrange to do whatever tasks are required to remove your subjects within the time period allotted. This may mean notifying your Lender to do the appraisal, and hiring a Home Inspector to do the home inspection, etc. Each of these tasks must also be coordinated with the Seller to ensure access to the property (generally organized by your REALTOR®). Each subject must be formally removed with a signed “Subject Removal” addendum after the conditions are met; if any subject is not removed before its deadline, the deal will collapse.
6. Once the subjects are all removed, your deal will be “firm“. You will need to deliver a bank draft or certified cheque to your agent for the deposit. You will need to notify your Lender and select a lawyer to assist you in closing the deal and transferring title. Your real estate broker’s conveyancer should look after notifying all the parties and ensuring each gets a completed set of the final contract documents and subject removals.
7. A few days before the “closing date” (the date the money changes hands, usually a day or two before the possession date) you will need to visit your lawyer and sign all title documents. Talk to the lawyer first and ask exactly what amounts he or she requires you to bring; generally you will provide a certified cheque made out to the lawyer “In Trust” in the appropriate amount to cover the adjustments and taxes and fees. Some lawyers will request a separate cheque for the taxes, some will split it themselves from a combined cheque. The lawyer will prepare a “Statement of Adjustments” which will include and clearly identify all the costs related to the transfer of the property; here’s a list of typical costs you should expect:
- The balance of your down payment, minus the deposit already held in trust
- your lawyer’s fees (typically $600 – $1200) plus disbursements and filing fees
- your Lender’s fees for processing the mortgage application (typically $200 or so)
- BC Property Transfer Tax (1% on the first $200,000 of property value + 2% on the balance) NOTE: The PTT must be paid from the purchaser’s cash assets, it cannot be added to the mortgage amount; some lawyers will request a separate cheque for this amount, made out to the government.
- GST (applicable to most new homes) NOTE: similarly to PPT, cannot be added to the mortgage.
- Mortgage Insurance. For any real estate purchase where the Purchaser’s down payment is less than 20% of the value of the property, CMHC requires mortgage insurance to protect the lender in the event you default on payment (in case there is not enough residual value in the property to cover the amount owed on the mortgage). Mortgage insurance is up to 2.5% of the value of the mortgage, and is added to the mortgage amount; rates fluctuate, check with your Mortgage Broker.
- Adjustments. For any home expenses that straddle the purchase date (for example property taxes, heating oil) the lawyers will calculate the pro-rated amount payable by each of the Seller and Buyer and adjust things accordingly so if the Seller has prepaid property taxes, he will be reimbursed by the Purchaser who will benefit from that prepayment from the date of possession forward.
- the balance of the mortgage amount will be transferred from the Lender directly to the lawyer in trust
8. Following the closing, when all money has been paid to the lawyer in trust, the lawyer will arrange to register you as the new owner (and the Lender as a lien holder) at the provincial Land Titles Registry. When title has been registered, the lawyer will notify you and your REALTOR® will arrange to give you the keys to your new home.
9. Other costs a Purchaser must consider:
- Home insurance. Your Lender will insist that you carry a home insurance policy sufficient to protect the value of the home should it be destroyed by fire, etc. Because the Lender will place a lien on the property, the insurance policy will be payable first to them. Lenders will not advance funds against home that are not insurable – if there is any question about the home you are purchasing, be sure to add a “Subject to home insurance being available” clause to your offer. Your home insurance must be effective at the time and date of closing (not possession).
- Utilities. You will need to arrange for telephone, cable, internet, hydro, etc. services to be connected and delivered to the home from the possession date. Some of these can have a several-week lead time, particularly if the home is new. Depending on your credit record with the service provider, you may have to pay a deposit.
- Moving costs.