Buying vs renting a home

 

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Don’t roll your eyes just yet. This is not another debate as to whether renting is better than buying or conversely. I am actually not advocating for either option. I have been both a renter and a homeowner. In fact, I have rented more than I have owned.

I noticed there is a lot of calculators out there to help people determine which option would make the most sense financially.

Most of these calculators are flawed for various reasons; the biggest one being that they calculate based on gross income instead of net. They also don’t take into account non-financial factors, which could have a huge impact on your decision.

So, I have come up with my own analysis: non-financial factors and financial ones.

buying a home is a long-term project

Where do you see yourself in five years? As a rule of thumbs, five years is the minimum amount of time you need to stay in a property to break even or be ahead financially.

During the first five years, you pay more interests than principal on your mortgage. You also need to recoup the closing costs you paid.

Don’t get fooled by crazy real-estate markets like Toronto or Vancouver. It can be tempting to sell  after a year or two, but you would actually be losing money by doing so.

if you need to buy a car or two, keep renting

Transportation costs in Canada are very high. They can -and will- eat-up a huge chunk of your income.

if you have student loans or credit card debt, keep renting…

…at least for the time being. Pay-off your debt or significantly lower it before looking at buying. Debt repayments are a huge financial burden.

A lot of recent graduates seem to be obsessed with becoming homeowners as soon as they receive their degrees. It sounds a little bit crazy to me.

So, you have determined the above first point applies to you and the second and third don’t. Let’s do some basic math.

35% of your net income is the maximum for housing costs

Lenders always use gross income to qualify people for mortgages and other loans. The problem with that is your gross income is not what is deposited in your bank account.

Always use your net income and really avoid going over 35%.

compare apples with apples

Compare the cost of renting and buying based on similar properties in similar neighborhoods. Renting or buying a two bedroom apartment will cost more than a one bedroom or a bachelor. You can find rental info on Craigslist or Kijiji.

include very comprehensive costs

Buying costs do not stop at the mortgage payment. Unfortunately, too many people can’t seem to look past this.

If you are buying a condo or townhouse, include: mortgage, strata/condo fees, monthly portion of property tax & any other municipal taxes, monthly portion of home insurance, monthly portion of Hydro and monthly portion of maintenance.

If you are buying a single, detached home, include: mortgage, monthly portion of property tax & any other municipal taxes, monthly portion of home insurance, monthly portion of maintenance and monthly portion of all utilities: hydro, gas, water….

a word on maintenance costs

As a homeowner, the biggest difference from being a tenant is that you are responsible for repairs and maintenance. And yes, you will encounter these! The costs will be different if you own a condo or a single detached house.

In a condo building, most of the maintenance costs such as landscaping, snow removal, elevator etc…are usually included in your strata/condo fees. Big ticket items, such as the roof, are shared costs. You are only responsible for repairs inside your unit. Costs are overall lower. Take 0.5% to 1% of the proposed purchase price. That’s your yearly costs. Divide by 12.

For a single dwelling, you are 100% responsible for all the costs and they are usually higher. Use 1.5 % to 2% of the proposed purchase price.

You may not spend the amount in a given month or year, but it is best to err on the side of caution.

final word

If the number you end up with is lower than the renting cost AND does not exceed 35% of your net income, happy house-hunting! Otherwise, keep renting and invest the difference.

If home ownership is important to you, you owe it to yourself to do the above basic calculations.

There will always be opportunity costs whether you own or rent. The answer to this old age question is not so clear-cut anymore.

 

Buying a foreclosed property

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Note: I am neither a Realtor® nor a Lawyer. This post is for information purposes only. It also focuses on the province of British-Columbia, where I live. 

A property is considered in foreclosure when a lender obtains  an order of sale from a Court and the owner is unable to redeem the property. In plain terms, this happens when an owner is behind on their mortgage payments.

Let’s take an overview of the process for buying a foreclosed property, as it differs from buying a traditional property.

the price on a foreclosure will be close to market value

Unlike in the United States for example, Canada’s Courts protect the owner, not the lender or the buyer. The sale price is as to be close to market value as possible. You won’t be able to buy a property at a deep discount. Lenders work with a Realtor® and the property is listed on the MLS®.

That being said, the listing price will usually be lower. There are a few reasons for this: the property is usually sold to the highest bidder in court, the property is sold “as is”, and if after all fees are deducted there is a profit, the lender has to write a check to the owner….most lenders don’t want to do this.

the only subject you can include is “subject to court approval”

That’s right, you are reading correctly. Unlike a regular purchase, you cannot include the usual subjects like financing, home inspection, review of documents etc…in your offer. This is a legal requirement. The offer presented in Court has to be free of subjects. When the lender/trustee approves your offer, you have five business days to get your affairs in order, i.e. obtaining financing, do a home inspection if you can etc…

This can be a bit tricky, which brings me to the very important next point.

YOU ARE BUYING THE PROPERTY “AS IS, WHERE IS”

Neither the lender or the Court makes any representations or warranties as to the condition of the property. Many documents may not be available to review. There will be no property disclosure statement. Chattels are not included in the sale, as the lender does not own them. A chattel is an item that is removable from the property, such as appliances. In an nutshell, you assume all the risks related to the condition of the property.

A lot of lenders will also not finance foreclosures.

once accepted, your offer becomes public

When the lender accepts your offer, a date in Court is set. Your offer is part of the public court filing for everyone to see.

be prepared for court

On the set date, you need to be present. You also need to have a deposit in hand. Unlike, a regular purchase, the deposit needs to be included with your offer.

The Judge -or Master-  will ask if the owner can redeem the property. If not, they will ask if they are any other parties interested. If yes, this is when the bidding war occurs. You only have one shot at this. All bids are presented in sealed envelopes. Usually, the property is sold to the highest bidder and/or the bidder with the highest deposit.

If the judge approves your offer, it becomes legally binding as the only subject is removed. You also need to pay close attention to details like spelling, names and legal description of the property, as there is no title transfer in a foreclosure. Instead the Order Approving Sale is filed at the Land Title Office. If there are mistakes, the Office could refuse it.

final words

Buying a foreclosed property is definitely not for the faint-of-heart. Should you decide to take this route, you will need to leave your emotions at the door. You will also need to be patient, as the process takes more time.

Don’t be lured by the perceived lower price. Since you are buying “as is”, you have no idea of the actual condition of the property. You could face big costs upon possession.

 

 

 

Buying a pre-sale property

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Both the real-estate and construction sectors are hot commodities in Metro Vancouver. New developments are spurting everywhere and everyday. Clever marketing makes it sound and look very attractive to buy a piece of property without actually seeing the finished product. But is it really the case? Let’s explore!

A pre-sale or an off-plan is an agreement between a buyer and a developer, where a developer agrees to supply a property by a certain date in the future. The buyer agrees to pay an initial deposit and then, once the property is built, complete the purchase. Deposits are usually paid in installments over a number of months or years. This is what helps the developer with obtaining further financing.

The major advantage of a pre-sale is that the property will be brand-new and in most cases customized to the buyer’s tastes. The property will also have warranty protection, usually 2-5-10 years . If something goes wrong during that period, it can be fixed at no costs to owners. An important advantage is also the building of equity. As house prices rise so does the contract on the property.

Pre-sales are hugely popular with investors. Pricing is usually a bit lower and they can usually see a profit before the property is built, and because it is brand new, they can rent it for a higher price. There is also a 7-day rescission period, in which the buyer can decide to opt-out.

Now, on to the disadvantages, as yes, there are a few.

  • GST is mandatory, 5% on top of the purchase price, which could mean thousands of dollars more
  • You may not qualify for a mortgage on a pre-sale. A lot of lenders are reluctant to pay for something that does not exist. A lender may also agree to fund only what the property is worth when built. It could be less than your purchase price.
  • Since the property will take a few years to be built, a lot can happen during that time: changes in your circumstances, in the real-estate market, in mortgage rules….you have to be aware of this before committing.
  • There could be delays in construction or in delivery date and you will be required to pay occupancy fees, even when you don’t live in the property. Nothing you can do about that!
  • Once you have signed, you can’t back-out of the purchase. Reassigning the contract could be difficult.
  • You most likely won’t be able to sale your property before the developer has sold all the units/lots.
  • The end-result could be different from what you asked.

As with everything, you need to do your own due diligence and research before buying a pre-sale and assess your risk tolerance. Be sure you have a lawyer or a realtor review the documents from the developer. The majority of developers will try to discourage you from having a lawyer or a realtor assist you. Don’t get fooled by this.

Mortgage penalty explained

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It has been over a month since my last entry. My life has been crazy-busy this year and I really needed a break. I took time-off work and I also had family visiting, which was exactly what I needed. I realized I also needed a break from my daily routine.

I am definitely more settled in my condo and new city. I enjoy living there and I know I made the right move by selling my previous condo.

Going through the madness that is real-estate in Vancouver, I have to write another post on the subject of mortgage penalty.

In Canada, when you pay-off your mortgage early, lenders have the right to charge you a penalty for doing so. Mortgages are a huge business here, and even with low-interest rates, lenders are turning massive profits.

The penalty you will be assessed depends on whether you have a fixed rate or a variable rate mortgage. As indicated in their names, the interest rate on a fixed rate mortgage will remain the same during the term of the mortgage. A variable rate, on the other hand will fluctuate.

This is because the interest rate on a fixed mortgage is determined by the bond market whereas the variable rate is determined by the prime rate set by the Bank of Canada.

This also explains why there are 2 different penalties: 3-month interest or Interest Rate differential -IRD-.

For a variable rate mortgage, the penalty will always be 3-month interest, as mandated by the National Housing Act.

For simplicity, let’s say you have $ 100 000 left on your mortgage with an interest rate of 4.00%. The penalty would be:

4.00  X  100 000  X  (3/12)  = $ 1 000.00.  Pretty straightforward.

There are 2 different ways of calculating the IRD. One could impact you in a significant way.

Once again, for simplicity, we will assume  a $ 100 000 mortgage at 4.00 % with 24 months remaining on the term.

With a standard IRD calculation, the lender will take the current interest rate for a 2-year term fixed rate mortgage, matching the 24 months left on your mortgage.

Let’s say the rate on this is 2.75%. The lender will the calculate the difference between this rate and your mortgage rate. i.e 4.00 – 2.75 = 1 .25.

The penalty is then calculated as follow:

100 000  X (1.25 /12)  X  24  = $ 2 500.00.  More than double the 3-month penalty!

A few lenders use a loophole in the Interest Act for the second way to calculate the IRD. The Act does not specify which rate should be used to calculate the penalty.

Let’s keep the same numbers as above. Some lenders use the posted rates instead of the contract/discounted rates, i.e. the rates you actually pay or would pay.

You obtained a rate of 4.00% but the posted rate on the day you got your mortgage was 5.25 %. The lender gave you a discount of 1.25 %.

The posted rate for a 2-year mortgage is now 3. 00%.

The lender will use an IRD factor of 2.25, i.e. 4.00 – (3.00 -1.25).

In terms of penalty, it amounts to:

100 000 X (2.25 /12) X 24 = $ 4 500.00, more than quadruple the 3-month penalty!

I know all these calculations look boring but it is crucial to understand how your lender calculates your mortgage penalty if you have a fixed rate mortgage.

I was lucky that my previous lender did not use the posted rate. They charged me a 3-month penalty as it was higher than the IRD. Had they used the posted rate, I would have paid over $ 4 000 in penalty. When I signed the documents, I did not pay attention to this.

Most people don’t, unfortunately.

For my second mortgage, I went with a variable rate.

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Closing costs in real-estate

I am finally all moved-in in my new home sweet home. I am glad this whole “real-estate thing” is finally over. I decided to sell my previous condo in mid-April. By the time it was ready for sale, it was the end of May.

It was listed early June and sold on the 14th at over-asking. I was lucky to be able to buy my current home shortly after. That being said, the completion and possession dates were mid-August for both condos.

I had been living in boxes and more or less camping since the end of June. I was happy to take all my belongings out of those boxes.

Closing costs are payment for all the necessary items to conclude or “close” a real-estate deal. These fees are paid by both sellers and buyers but are different.

For the 2 transactions, I had budgeted $ 29K in closing costs….they came in at just above $ 25K. Staggering, isn’t it?

These fees creep-up very easily and add-up to big dollar amounts. They are always a surprise for most people, including myself. Here is a non-exhaustive breakdown of them:

When selling

  • Realtor commission:  in BC, it is usually 7% on the first $ 100K and 2.5% on the remaining balance
  • Legal fees: to clear the title. The fees are lower when selling as there isn’t much involved.
  • Mortgage penalty, if applicable: if you break your mortgage before term, lenders will charge you a penalty, either 3-month interest or Interest Rate Differential -IRD-
  • Mortgage discharge fee, if applicable: most lenders will also charge you an administrative fee to discharge the mortgage

Upon selling, the buyer will usually reimburse you for your share of the property tax and strata fees -if you buy a condo-.

When buying

  • Legal fees: these will be higher for purchasing, as more work is involved
  • Property transfer tax: cash grab from most governments. In BC, the rates are: 1% on the first $200K, 2% on the remaining balance up to $ 2 millions, 3% up to $ 3 millions. If you are a first-time home-buyer and your property is under $475K, you are exempt from this tax in BC.
  • Down-payment: your biggest closing cost by far!
  • Mortgage default insurance: if you buy with less than 20% down
  • Mortgage application fee: most lenders will waive this, but some will charge you an administrative fee to process your application
  • Title insurance: most lenders will require this. It is to insure you are the rightful owner of the property
  • Appraisal fees: if you buy a detached house, the lender will ask for an assessment of its value to insure you are not overpaying. It is less common for a condo
  • Land survey: for detached houses only. A lender may require a detailed plan of the land showing property limits, easements and rights of way.
  • Interest adjustment: You need to pay the interests on the mortgage for the month you close
  • Other adjustments: you will most likely have to reimburse the seller  for their share of the property taxes and strata fees
  • Fire insurance: lenders require to be first payee in case of a fire. Insurance companies will charge a fee to prepare the applicable document

Other fees that are not included in the statement prepared by lawyers/notaries:

  • Home inspection: if you can do one, that is great but it costs around $ 500.00
  • Moving company: unless you have willing friends, you will need people to move your belongings to your new place
  • Home insurance 
  • Utility hook-up & transfer: BC hydro charges $ 12.50 to transfer your account. Your cable company may also charge you fees
  • Locksmith: it is probably a good idea to have the locks of your new place re-keyed

As you can see the list is pretty long! When it comes to closing costs, you are better off thinking “high” than “low”. They will always be higher than what you think.

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In favor of the “starter home” concept

I am glad June is over. Last month was definitely a whirlwind, hence the lack of activity on my blog.

Thanks to the Vancouver red hot real-estate market, my condo sold for over-asking and in less than a week!

It is definitely a sellers’ market at the moment. As a buyer, I felt the pinch. On several occasions, I wasn’t fast enough and the property was already sold. At other times, there was a bidding war I was not willing to enter.

I ended-up finding the right condo when I increased my budget by $ 10 000. Luckily, I did not find myself into a bidding war and was able to put subjects in my offer.

To ensure I could actually afford my new place, I used a couple of tools: Ratehub and the real life ratio by Rob Carrick.

I also contemplated going back to renting. I would also have been able to afford a nice place, but finally decided against it. After further number-crunching, it simply does not make sense for me financially.

During the whole process, I ensured I did not make any of these previous mistakes or these ones. I also had the right Realtor.

Which, somehow, brings me to the next point. I have gained a whole new appreciation and perspective on the concept of “starter home”.

I now see this as “trial and error”. Let me elaborate a bit.

As a first-time home buyer, I knew nothing about real-estate, mortgages and the whole process. It was a steep learning curve and I felt overwhelmed.

Money was also tighter. I pretty much put all my savings in the purchase and then some.

I also wasn’t sure of what I actually needed in a home, and living in Vancouver, I had to adjust my expectations big time.

My current condo’s layout is not that functional. It has 2 bathrooms and it is one too many for me. The walk-in closet in the master bedroom is also too small. First-world problems, I know!

Unfortunately, the Realtor I randomly chose back then was not really helpful and did not give me sound advice. I ended-up buying in my current building, in a neighborhood I wasn’t thrilled about.

For my second purchase, I did not go with bigger, but with smarter and better. I ditched the second bathroom in favor of a den, the layout is way more functional and both building and neighborhood are much better. I am not going to see any special levy anytime soon in my new home.

I am really exited about moving-in -and by extension moving-out of my current building-. I hope that it will be more of a “permanent” home for years to come.

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Choosing a Realtor when selling

I can’t believe it is almost June. Life has certainly taken precedence over this blog lately. Getting my condo ready for sale took longer than expected. I also ran into a few somewhat unexpected issues.

All is now sorted and my condo is about to be listed. Choosing the right Realtor can make or break a sale, therefore should not be done lightly. One of the keys is to ask them plenty of questions, the more the better. You also need to do your own research about them.

  • Your Realtor needs to have a track of sales. This sounds obvious, but it is not always easy to verify. Don’t just rely on what the Realtor says. Ask for some tangible proof. If you live in the Greater Vancouver area, you can check the Medallion Club. The site lists the top 10% of sellers.
  • Real-estate needs to be their full-time job. Real-estate involves more than just selling or assist in buying. The regulations are also constantly changing and you need someone who is up-to-date and licensed.
  • They need to to be working where your property is. Each city and neighborhood are different. Buyers and prices will vary. If a Realtor doesn’t know the city and the neighborhood, they won’t be able to market and sell it at the right time, for the right price.
  • They need to charge a regular commission. The standard in BC is 7 % on the first 100K and 2.5% on the remaining balance. A Realtor splits the commission with the buyer’s agent. Some brokerage firms charge a flat dollar amount or they charge 2 or 3%. From a financial perspective, it is very tempting, but you are not helping yourself here. Let me elaborate a bit. If a Realtor charges you 2 or 3% of the selling price, the buyer’s agent is not getting much. I saw listings with a buyer’s commission at 0.5%…ridiculous! Buyers’ agents are not going to show your property if they won’t make any money! You probably won’t get much from your Realtor either, in terms of Marketing and Advertising. Ultimately, you get what you pay for.
  • They need to give you a realistic listing price. This is the most important point, and sometimes, the most difficult point for the seller. A lot of home owners have an inflated idea of what their home is worth. In a red hot market like Vancouver, it can be really exacerbated. Unfortunately, plenty of Realtors are more than happy to go along. It is called “buying a listing”. You are not helping yourself either here. If the price is too high, your home will linger on the market until your lower the price. Doing so will hit you further as prospective buyers may think you are desperate and open to low offers. Ask for a Comparable Market Analysis – CMA or Comps-. A CMA will tell you the recent sale price of similar homes in the area.
  • They need to have an actual marketing strategy. A sign on your lawn and a listing on the MLS won’t cut it those days. A new listing will get the most attention in the first month. After that, it becomes somewhat stale. Ask them how and where they will market your property, both online and offline.

Selling your home can be an emotional roller-coaster, particularly when you are attached to it. Choosing the right realtor can help you alleviate the stress. Ultimately, you need to work with someone you like and are comfortable with….as well as someone who does all of the above.

3 tips to sell your property faster and perhaps for more $

Image result for for sale home signs

As I previously mentioned, I have been reassessing my living situation lately. I have actually decided to sell my condo. Beyond the repairs the building needs, I simply don’t see myself living there on a long-term basis.

I guess I have a whole new appreciation for the concept of “starter home”. But, I digress here.

I haven’t listed my unit yet, as it needs a few improvements before I can proceed. I also need to ask my lender about my mortgage penalty and figure out other details.

It is all about finding a financial balance between making my place more attractive without breaking the bank. I don’t want to spend a ton of money since I won’t be the one enjoying the upgrades.

Here are 3 tips that could help you sell your property faster and for a better price:

  • De-personalize: this is probably the most important thing to do. Prospective buyers need to picture themselves and their belongings in your home. Opt for neutral colors and remove items that are strongly reflective of your tastes and personality. No doubt your doll collection is pretty impressive, but it may be a turn-off for a prospective buyer. Same with colors. Your daughter’s bedroom may be the prettiest in pink, but again, a prospective buyer may not see it that way.
  • De-clutter: it is about making a good first impression, and making your home look bigger.
  • Keep it clean: it can be challenging if you have kids or pets, but it is in relation with the 2 above points.

There are a few things you can do to sell your home, but this is a good start!