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April 2005
I thought
you'd never ask
It seems useful, if only for
a change of pace, to deal with three questions that have kept crossing
my desk these past several months. I have to admit that the answers
go beyond a simple yes or no, but I also can't help thinking that they aren't
as well known and understood as they perhaps ought to be.
So then .....
What sort
of offer should I make?
There are two answers to this question and a few observations
that flow out of them, as follows.
a) For a start, it should largely ignore the asking price,
which is only that: the amount of money that the seller (along with
the listing agent) is hoping you'll be prepared to pay.
b) In contrast, the offer price should reflect what you
think the place is worth -- and this should be mainly based on a Comparative
Market Analysis (which gives you a statistical support for your opinion).
c) Beyond these two considerations, though, there's the degree to
which you want/need your offer to be accepted. In other words,
the more vital an acceptance is, the stronger your offer needs to be -- and
in this regard, five factors will increase its chances:
i) little or no difference from the asking
price (and if you're involved in a bidding war, the key then is almost
certainly[not to mention alas and alack!] to rise above it)
ii) an above average deposit (and the higher it is the better,
although there's no reason why it shouldn't be held in an interest bearing
account for your benefit until the closing date)
iii) few, if any, requests for chattels (e.g. let the seller keep
the fridge and stove instead of asking for them to come with the house)
iv) few, if any, conditions (e.g. a cash offer will tend to beat
one that calls for a 14 day check with the bank before the deal can be confirmed)
v) a quick closing date (or sometimes a longer one that coincides
with what the seller prefers -- e.g. the construction of a new home has
to be finished before the seller can move into it).
d) Nevertheless, you should make sure that, at the
same time, you aren't putting yourself (and therefore the seller) at
any undue risk. Thus, when the situation calls for it, you are well
advised to incorporate such conditional clauses as those that deal with:
i) financing
ii) inspection
iii) prior sale of your present property
iv) availability of a building permit
v) change of use (including need for rezoning)
How -- and what -- does everyone get paid?
With very few exceptions, an MLS listing (and quite often
it applies in other cases) means that the seller has agreed to pay the Listing
Brokerage a commission that represents a stipulated percentage of the accepted
offer price. In turn, and again with only a limited number of exceptions,
this amount is shared (usually on a 50-50 basis) with the Selling Brokerage
-- and this is with the seller's consent, which is incorporated in the Listing
Agreement they sign.
At the risk of confusing my readers, I need to mention that, in compliance
with a strict legal definition, the "agent" in any transaction is the Brokerage
Company and not the salesperson who is simply acting in its name.
In any case, the agent pays, ahem, the agent only a portion of what it
receives and then applies the balance to its costs of providing the support
services the agent needs (e.g. office space, desk, phone, computer hookup,
photo copying, secretarial assistance, etc., etc, etc.) to do what it's to
be hoped he/she is capable of doing.
Of course and regardless of what is, in effect, a fourway split of the
commission, it's entirely fair to say that -- as I pointed out in one of my early newsletters --
the commission covers the expenses involved in servicing all the listings
that don't sell.
A more relevant point, though, is that the source of the commission is
the buyer's money. The seller actually simply uses it
to cover the cheque that's sent to the Listing Brokerage -- which, as I'm
forever pointing out, underpins the case for buyer agency.
But it also means that the seller does not end up with the accepted
offer price but only the major portion of it. Thus, on occasions --
such as with a FSBO transaction -- this leads to an arrangement whereby the
Buyer Agent commission is paid directly by the buyer to their agent, with
a commensurate reduction in the offer price.
What are the additional costs and who pays them when?
Once an offer is accepted, the deposit and the balance of
the purchase price when the closing date arrives are readily determined, but
numerous other amounts crop up (sometimes unexpectedly!) in the course of
starting and completing a purchase transaction. The specific amounts
will vary, as will the times payments have to be made, but it's best to allow
for the following.
a) Arranging a mortgage
If you aren't paying cash or need no more than some financing from the
seller (and maybe even then), you're going to be liable, one way or
another, for several extra costs, as follows:
i) mortgage application and processing
This is likely to require an upfront payment of +/-$200 from you if you're
dealing with a bank and it may -- or may not -- apply if you're using a mortgage
broker (see final sentence in point iv) below).
ii) loan default insurance (from CMHC -- Central Mortgage
and Housing Corporation)
This will apply if you want to borrow more than 75% of the purchase price, and
it runs from a low of 1% to a high of 3.5% of the loan amount. However,
this is invariably incorporated in the mortgage principal -- although it does
mean you'll be paying a commensurately additional amount of interest over
the years!
iii) life, sickness, and accident insurance
Quite often, you can have a small premium added to your monthly payment
to give you this protection (and it makes some sense to do so). Again,
though, it means paying interest on the addition.
iv) mortgage broker fee
Most of the time, it costs you nothing to have a mortgage broker shop around
for rates and terms for you, but on occasion you will be asked to pay for
the privilege (especially if you or the property you're trying to buy aren't
in a Triple A category). However, the broker is required by law to advise
you -- and to get your written aproval -- of any such charge before processing
your application. Moreover, the charge is then invariably incorporated
in the mortgage principal. In turn, too, it's sometimes possible to
have the +/-$200 mentioned at point i) above also included in the total loan
amount.
b) Having the property appraised and inspected
You are well advised to incur these expenses, if only to avoid any surprises
after the fact, but the amounts and times of payment will vary in acordance
with the following:
i) You can expect to pay for an appraisal
if the bank (or other lending institution) requires it. However, you'll
be neither given a copy of it nor meet with any willingness to share its
contents with you. The most you'll be told is that everything is
AOK -- and you'll still be charged for the exercise if it isn't!
Payment will either have been obtained from you when you began your mortgage
application or it will be looked for before the lender proceeds any further.
The amount is unlikely to be more than $175, although it can be if the property
is an unduly complex one.
ii) If you don't have to have an appraisal done, it can
still be useful to arrange and pay for one. Moreover, it can sometimes
be made a prelude to an offer or even form part of one of the conditions in
it (i.e. per words to the effect that "This offer is conditional upon
the property being appraised for no less than the purchase price agreed upon
in this Agreement"). The cost will be no different than if the
bank makes the arrangements, but you will, of course, be involved in a direct
payment to the appraiser.
iii) A home inspection will cost you +/-$300, with direct
payment being made by you at the time it' s carried out. It can, of
course, be triggered by an appropriate clause in your offer OR you can decide
to have it done at whatever other time you deem advisable (including, with
the seller's co-operation, before the closing date [but then not as part of
any condition]).
c) Legal fees and disbursements
My website includes an account of the closing costs you can
expect, but it makes sense to discuss them ahead of time with your
lawyer. As a general rule you can count on having
to pay +/-$500 to him/her and about the same again for the filing and registration
fees with the Land Titles Office.
d) Land Transfer Tax
This is one of the tax grabs that governments are so fond of! As
with Income Tax -- which was introduced as a temporary measure and was supposed
to disappear shortly after the end of the First World War (yep, WWI not
WWII) -- there seems to be scant hope of it ever being discontinued.
The rate varies among our provinces, but here in Ontario it runs from one
to two percent of the purchase price -- which is no small sum, is it?
You can determine the total due (without spending a dime!) if you type the
purchase price in on the webpage you'll find here.
Anyway, if you take the third of these recurring questions it can
mean that you're looking at having to come up with as much as 3% (or
even more) over and above the purchase price. Indeed, many lenders are
now looking for confirmation that you've made sufficient allowance for the
few thousand dollars involved.
Ah, the joys of real estate, eh?
Duncan Pollock, Real Estate Broker,
427 Gate Street, Niagara-on-the-Lake,
Ontario, Canada L0S 1J0
Tel: 905-468-3154 Fax: 905-468-3812
Cellular: 905-704-9037
email: dsp.pru@sympatico.ca
website: http://www.duncanpollock.com
PS. One of my
web pages provides a list of the other newsletters I've sent out. If
you choose to go to it, you can click on any title to bring up its full text.
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