Skipping these steps could get you in hot water when buying a house
Imagine you’ve just purchased a new house with your dream backyard. It has a gazebo to escape sweltering summer days and a hot tub to ease your aches and pains.
Now imagine, come move-in day, you show up at your new home only to have your dream shattered because the previous owners took those precious amenities with them.
That’s exactly the unfortunate series of events that happened to the clients of Ontario real estate lawyer Mark Weisleder.
“The seller took the hot tub and the gazebo out of the backyard because he said it wasn’t a fixture,” Weisleder told Yahoo Canada Finance.
“Now you have lawyers going to court to figure out how it was attached: was it attached a certain way? Were there wires? Was it hardwired? Was it not hardwired? Was it bolted into the ground or not?”
And that’s why he stresses to homebuyers the importance of writing everything down and being “as detailed as possible” in a contract about what is going to be included in the transaction.
This is just one of the things that people should never skip if they want to avoid headaches and potentially nightmare scenarios after a sale.
In the aforementioned scenario, Weisleder stressed that the lesson is “be as detailed as possible about what you expect to receive upon closing.”
“List everything inside the house or outside that you hope to keep,” he said.
“The more detailed you can be when you write these things down, the less chance of an argument or misunderstanding … after a closing.”
Weisleder said that some of the common points of contention are closet organizers, mirrors, television brackets or other items that are “built-in.”
In particular, he said that buyers should be as clear as possible about keys.
“I have had people buy places, and there are sliding doors, and there are no keys for the locks,” he said.
“And it costs a lot of money to get a locksmith to take [them off].”
Skipping out on a home inspection can also end in disaster.
According to the Real Estate Council of Ontario, 15 per cent of homeowners wished they had used an inspector when purchasing their house.
Weisleder said he has seen a number of situations where buyers find mice or mould after closing, but unless there is a “major defect” that they can prove the seller knew about and they couldn’t have found it, “for the most part, it is buyer beware.”
The problem is, according to Weisleder, that in the red-hot real estate markets across Canada many buyers are facing the prospect of a bidding war and are encouraged to place an offer without conditions, such as a home inspection.
And buyers who insist on doing an inspection could spend several hundred dollars and not have the winning offer as they’re sometimes going up against five or six other bidders.
Furthermore, they could be forced to pay for several inspections before they come away with a winning bid.
But in the balance, Weisleder said it is worth it to spend a couple thousand dollars getting some “piece of mind” that a home isn’t a ticking time bomb when the average Canadian is making an investment of more than $500,000 or topping $700,000 and $900,000 in major cities such as Toronto and Vancouver respectively.
“There’s a real risk when you buy a house with no inspection,” he said.
Make sure your money is available
Weisleder said buyers can run into trouble with banks when they want to use money from RRSPs, brokerage accounts or need to close a certificate for a sale.
He said real estate transactions can be put in jeopardy because buyers are ignorant of conditions surrounding the amount of notice needed for a withdrawal.
“I find that some people … don’t get that right and if they don’t have the money on time, then they could default on the deal,” said Weisleder.
However, money can be easily transferred from most bank accounts on the day of.
Another process that buyers shouldn’t neglect, according to Weisleder, is something a simple as walking through the neighbourhood of the home you’re eyeing.
While there’s a plethora of information online — including walkability scores, neighbourhood guides and listings of schools, restaurants, parks and other attractions — Weisleder said there’s no substitute for taking a stroll to get a real feel.
“Just walk it … Talk to people. Talk to neighbours. Get a sense of the neighborhood, the amenities,” he said.
Despite the wealth of information on online, Weisleder said it would be “very hard” for most people to go through the buying process themselves, as they simply don’t have enough time to track constantly fluctuating real estate prices in neighbourhoods across Canada.
The first step, he said, is to find a good local realtor who knows the area you’re considering and has a “sense of the market.”
Weisleder advised buyers to get referrals to get a sense of how they perform in bidding wars, which is vital in Canada’s hyper-competitive market.
“You really have to know how to read people and it is very hard to do this by yourself,” he said.
Weisleder also said many banks won’t trust the final numbers that have been agreed upon by private buyers.
“It is very hard to get a mortgage when you do a private deal because the banks don’t know how you came up with the purchase price so they’re going to need their own appraisals – they’re going to be suspicious,” he said, adding that buyers going it alone also “invariably” make mistakes with the paperwork as well.
Weisleder stressed that buyers should also add a lawyer to their team to close the deal, a home inspector, a contractor (when an older home is being acquired to assess how much it will cost to make repairs) and a mortgage broker.
Determining the costs you can handle
One of the processes that a mortgage professional can help buyers with, according to Pat Giles, associate vice-president of real estate secured lending at TD Canada Trust, is determining how much they can actually afford if you take into account income, budget and the lifestyle they want to maintain after they purchase a new home.
“It comes down to considering what your priorities are,” Giles told Yahoo Finance Canada.
“I have friends who have travelling as a high priority, so they consciously made a decision to go with a less expensive home so that their mortgage takes a lesser proportion of their overall budget.”
Giles said TD often suggests that buyers “test drive their mortgage” by making automatic transfers in the amount of their mortgage into a Tax-Free Savings Account or a regular savings account for a couple of months.
He said this allows clients to see how they deal with the added expenses and, at the same time, save for a larger down payment.
The Canada Mortgage and Housing Corporation, says, in general, that a person’s total monthly housing costs (meaning their mortgage payments, property taxes and heating expenses) should not exceed 32 per cent of a person’s gross house monthly income.
It also suggests that their debt load (housing costs plus car loans, credit card payments, personal loans, line of credit payments and other debts) shouldn’t be over 40 per cent of their monthly income.
In addition, buyers need to factor in whether they will need mortgage loan insurance, which they will need if their down payment is less than 20 per cent of the value of their new prospective home.
The CMHC offers a household budget calculator that can be seen here.
However, Weisleder suggests buyers shouldn’t borrow right to these limits.
“(That’s) when you’re living to pay your mortgage,” he said.
“When you do that life is not so much fun … it is very stressful.”
Getting pre-approval … and more
Giles said getting pre-approval for a mortgage is also integral to a smooth home-buying process.
At TD, getting pre-approval means that a buyer’s credit history and income has the bank’s seal of approval and guarantees them of a loan up to a certain amount for 120 days.
“It really allows you to go out and shop with confidence because you’ve been given a number you can confidently stand behind and that allows [you] to feel good about the next steps and your budgeting,” said Giles.
While Weisleder said getting pre-approval is vital in knowing how much you can afford to spend in a bidding war, banks sometimes will not provide their initially promised mortgage if its appraiser pegs the value of the house you purchased for less than what you paid.
“I’ve seen some buyers scramble and either they borrow the money from relatives or they’re in danger of defaulting,” he said.
“You can’t just depend on the bank to the give you the money you were pre-approved for, they have to determine the house was worth it.”
Weisleder advised buyers to have an additional five to 10 per cent down payment deposited in reserve just in case.
Prepare for closing costs and the unforeseen
Even though you’ve likely depleted your life savings on putting together a winning bid for a home, you’ve only just begun to realize a lifetime of expenses.
Following the sales, both Weisleder and Giles said buyers need to be wary of a wide range of additional closing costs, including land transfer taxes, legal and title deeds, property surveys, moving costs, utility adjustments, lenders’ administration fees and prepaid property taxes.
Giles advised buyers to build a three-to-five per cent buffer to cover these added expenses.
In particular, Weisleder said lenders administration fees, prepaid taxes and prepaid tax bills can sneak up on buyers.
Weisleder also suggested that buyers who are also selling at the same time to stagger the closings of their transactions.
He said if they don’t, a buyer can wind up temporarily homeless if, for example, a seller unexpectedly needs extra time to move out.
“You may have to end up staying in a hotel, paying extra storage costs – it’s a nightmare,” said Weisleder.
He added that buyers should close their new home a few days earlier and move in slowly. Weisleder said they can do this with a bridge loan, which banks provide because they know there is money coming down the pipeline shortly from their previous home’s sale.
