Buying a home will likely be the biggest single financial decision you’ll ever make.
This article was first published on Oakwyn real estate agent Jeff Appelbe’s blog.
If you’re like most Vancouverites, the purchase will consume most of your savings, and your mortgage payments will eat up much of your take-home pay in the years ahead. Done right, it’s a worthwhile investment, but there are pitfalls along the way – especially for those going through the process for the first time. Any one of them can be costly. Below, I’ve put together a list of the most common home-buying mistakes and some pointers to help you avoid them.
Home Buying Mistake #1: Incomplete Budgeting
This is a big one. Homebuyers, especially first-timers, are often so focused on the list price of the properties they’re touring that they forget about the other costs involved in making a purchase – taxes, insurance, legal fees, moving expenses, and so on. These additional expenses can reach into the tens of thousands of dollars, meaning a failure to plan for them can lead to problems down the road. In Vancouver, these extra costs include:
- Property transfer tax: This is calculated as a sliding percentage of the home’s fair market value (equal to $14,000 on an $800,000 home, for example). The province has provided a calculator to help you do the math.
- Deposit: This will generally be 5% of the purchase price, payable within 24 hours of an accepted offer. It’ll be held in trust until completion, at which point it will be rolled into your down payment.
- Mortgage Insurance: Under Canadian law, you have to insure your mortgage if you your down payment is under 20% (helping to cover the lender’s losses in the event you default). This added cost is equal to as much as 4% of the value of your mortgage, usually paid by the lender as a lump sum to CMHC and then billed back to you on to your monthly mortgage payment. It’s a not-insignificant added monthly expense. CMHC’s mortgage calculator will give a more precise estimate.
- Property insurance: This is usually required by lenders. It’s applicable to the whole property in the case of detached homes, but only to your unit’s contents and previous upgrades in the case of strata (typically, the strata corporation will take care of insurance for the building as a whole). Rates vary.
- Legal fees: While your real estate agent (paid by the seller), will write up your Contract of Purchase and Sale (a.k.a. your offer), you’ll likely have to pay a lawyer or notary public to finalize the property transfer process and ensure you’re legally protected. This will generally cost around $1,000-$1,500.
- Title insurance: This protects you against challenges to the ownership of your home. It will usually run you a few hundred dollars and will likely be rolled into your legal fees (your lawyer can provide more details).
- Property tax adjustment: This is reimbursed to the seller for any property taxes they prepaid to the July year-end. It varies by municipality, property value and time of year.
- Home Inspection: This will usually run you $300-$600, but it’s well worth the investment to ensure you know what you’re getting (see below).
- Site Survey: This is sometimes required by lenders – particularly on detached homes. Expect to pay $500 or more.
- GST: This tax, equal to 5% of the purchase price, applies only to new homes (and may be subject to a partial rebate under certain circumstances).
- Foreign Ownership Property Transfer Tax: This is a big expense – equivalent to 20% of the home’s fair market value – but only applicable if the home is in Metro Vancouver (or another designated area of BC), and you’re planning to transfer it to a foreign entity.
- Other expenses: These can include a host of costs that arise after you take possession, including moving expenses, renovations, redecoration, repairs, new furnishings and utility connections fees.
Make sure you factor all of these in when budgeting for a home purchase. The final total can land substantially above the sticker price.
Home Buying Mistake #2: Failing to Get Pre-Approved
Before you start looking for a home, it’s vital you have a clear idea of how much you have to spend. That means getting pre-approved for a mortgage. For those new to the process, a pre-approval is a document from a lender stating how much they would be willing to lend you and at what rate, taking into consideration your income, down payment, debt-to-credit ratio and other factors. It’s not a guarantee – since final approval is dependent on the value and quality of the home you choose – but it gives you a good idea as to how much house you can afford.
This will help guide you through the selection process, make sellers and real estate agents take you seriously and strengthen your position in a competitive bidding situation. Pre-approval also comes with a 90- or 120-day interest rate guarantee, meaning it will protect you against rate hikes. It’s free, and you don’t have to go with the lender who provides it. Diving into the market without this tool puts you at a needless disadvantage.
Home Buying Mistake #3: Narrowing Focus Too Quickly
Buyers often start shopping for a home with some specific ideas in mind; they want a particular type of house in a particular neighbourhood. While it’s good to understand your needs, trimming the options too quickly can eliminate some valuable opportunities out of hand – homes that meet your needs at a good price, but that you might not consider at first glance. It pays to keep an open mind and explore listings outside your comfort zone – at least at the beginning of the process.
Home Buying Mistake #4: Paying Too Much for a Mortgage
Shopping for a mortgage is a grind. A lot of prospective buyers – and particularly first-time buyers – are tempted to fast-forward this process to avoid the pain, going with the first mortgage they find, often from a big bank or even their own bank. This is a mistake.
These days, a wide range of lenders – including some very strong non-traditional institutions – offer mortgages with a variety of rates and terms. Finding the right one can make a substantial difference to your buying power and your monthly payments. It’s a hard world to navigate on your own, though, so I generally recommend clients enlist the services of a mortgage broker. A good broker will use their knowledge of the industry to find you the best bang for your buck – in return for a commission from the lender – freeing you up to track down that dream home. It’s worth the effort.
Home Buying Mistake #5: Giving in to FOMO
Looking for a home can be a discouraging process. There’s nothing worse than sifting through scores of properties to find your dream home, only to watch it get snapped up by someone willing to fork over more cash. After a while, it can start to feel like you’ll never find the right property, and that all the opportunities are passing you by. This is a common feeling, but don’t let it tempt you into rushing the process.
In my experience, buyers who give in to frustration or fear and settle for “close enough” invariably regret that decision. Your home will be central to your life for a long time – maybe a very long time. It’s worth investing the effort up front to be sure it fits your needs. If you’re feeling frustrated, talk to your agent – recalibrate your strategy if need be – but make sure you take the time to find the right house in the right location at the right price. If not, you risk much greater frustration down the road.
Home Buying Mistake #6: Failing to get an Inspection
This is a problem that generally comes up in hot markets. When homes are flying off the shelf – when buyers are climbing over each other to put in bids – it can be tempting to skip the home inspection to save the fee or to give your offer a competitive edge. This is a bad idea.
A home inspection is invaluable in helping you avoid pitfalls. For an investment of a few hundred dollars, a trained professional can give you assurances that your future home is sound – or to alert you to danger if it’s not. The things they turn up can range from the minor (a broken window seal) to the deal breaking (a termite infestation or a bad foundation). This insight will allow you to price problems into your offer or avoid making an offer altogether. If a compressed timeline makes squeezing in an inspection tricky, talk to your real estate agent. It might be possible to find a creative solution. It’s certainly worth the effort.
Home Buying Mistake #7: Skipping the Strata Documents
When a buyer is considering buying into a strata property, they will typically be handed a stack of dense documents – meeting minutes, depreciation reports, engineering reports – and told to review them before making a decision. The experience can be overwhelming. As a result, some buyers are tempted to short-circuit the process, giving the text a cursory glance, even skipping some documents entirely. This is a risky thing to do.
While your agent can help guide the review process and your home inspector can give you some insight into the current condition of the building, their efforts are no substitute for reading the documents carefully yourself. There may be information in there signalling a big upcoming levy, strata conflicts, financial mismanagement, overly restrictive bylaws or other issues that could directly impact your decision to buy. Consult your agent for guidance, and check out my post on strata documents for more pointers.
Home Buying Mistake #8: Buying Before You Sell
This is another one that crops up when houses are going fast. The pressure that comes from a seller’s market can tempt prospective buyers into snapping up their next home before they’ve unloaded their current property. Sometimes this works out; the client simply puts their house on the market and it goes for their asking price. But at other times it doesn’t, and the consequences can be dire.
A bad valuation, a dip in the market or an unexpected lack of interest from buyers can leave your home on the shelf going stale. If you’ve finalized the purchase of a new place when this happens, it can leave you in a bind. You may not be able to drop the price, since you’ve already committed to a certain down payment, and waiting may leave you trying to carry two mortgages – a situation that’s at best stressful and at worst untenable. Avoid this pitfall. Finalize the sale of your current home before you finalize the purchase of the next one.
Home Buying Mistake #9: Getting Dazzled by Bells and Whistles
When you’re touring properties, it’s easy to get distracted by the little things. We’re all affected by them: Granite countertops, new appliances, even a fresh coat of paint can transform a home from ho-hum to stunning (and in fact, I work with clients to stage their homes for exactly that reason!). But as a buyer, it’s important to look past those surface features to what really matters: Is the building structurally sound? Does the layout meet your family’s needs? Is it in the right location?
Failing to keep these considerations front and centre can lead to disappointment later on. Remember: You can always swap out the fixtures after you move in; it’s a whole lot harder to swap out the neighbourhood.
Home Buying Mistake #10: Going it Alone Without an Agent
Okay, I admit I’m a little biased on this one, but the reality is a real estate agent is vital to ensuring a home purchase goes smoothly. A good agent will not only guide you toward the best home for your needs; they will also put forward options you may not have considered, identify potential problems with a home or location, write up offers and counter-offers, steer you away from certain legal pitfalls, iron out any wrinkles that arise during negotiations and help you get the best price for your current property. An agent’s services are free for buyers (since sellers pay the commission), so it’s certainly worth the time to find one.