Changing the way business is done in Ottawa

There are probably quite a few people that read this blog that do not have any experience whatsoever in real estate. This is fine. It's one of the main reasons that I have this blog. I enjoy sharing my knowledge and experience with everyone. As such, I am going to talk a little bit about another speaker that was at the OREIO roundtable on Monday.

The speaker was a lawyer. Now, lawyer's tend to have the mindset that anything that can go wrong will go wrong and that's not necessarily a bad thing. You want to be protected by the law in case something does not work out for you, especially in real estate. With such high dollar amounts, a bad deal in real estate can take years or even decades to recover from. I was definitely listening closely to what he had to say.

With the recent decline in the markets, there is a greater likelihood that someone will be pulling out of a signed deal. A potential buyer could have second thoughts when purchasing a home, especially if they have just lost their job. Now, as a seller, you need to protect yourself against this. Typically, a deposit is given at the time of offer to show the vendor the seriousness of a bid on a property. In Ottawa, the amount has usually been a token amount, about $1000. This is not the rule, but fairly custom in Ottawa.

Now, the $1000 is all that the vendor has against the buyer if the buyer backs out. This is not sufficient. If you have pulled your house off the market to work a deal, you are possibly letting other potential buyers slip by. You need to be compensated for this. It is not uncommon for a property in Toronto for the deposit to be in the $20,000-$30,000 range. This allows the vendor to recover some of the legal fees and some of the headaches that accompany this type of failed deal.

The lawyer's message was clear. Ask for larger deposits when selling your home. If buyer's are serious in your property they will put up or shut up. It's important that you protect yourself from a bad deal, especially given the deteriorating economic environment.

Budgeting

When you are going to go and buy your home, there are a few extra costs that you might not consider. For example, I've mentioned lawyer fees and home inspections in previous posts. All of these costs can add up quickly. They can eat into your downpayment, and although you may be approved for a larger amount, you likely want to keep your mortgage to a minimum.

I would say that you should plan to spend between 4-5 thousand in cash, outside of your downpayment. Why is this important? Well, if you are planning to take advantage of the Home Buyer's plan, you will need cash to pay for your deposit (usually about $2000), plus things like home inspections and lawyer fees. These items add up quickly and you may not be able to get the cash out of your RRSP's quickly enough to close a deal. The last thing you would want is a house of your dreams slipping through your fingers because you have your money "tied-up".

This is also important when it comes to mortgage insurance. Canada's mortgage system requires that you purchase insurance on a mortgage where you do not have a minimum of 25% deposit. 25% deposit is a very large sum and if you are near that amount, you'll want to ensure that you will have enough cash to pay for any extra costs that might incur. You don't want to buy the insurance because it gets expensive in the long-run.

Now, I'm being conservative by estimating $4-5K. You will likely not need this much cash for everything, but it will be good that you have an extra buffer of cash. Not only can things come up during the buying process, there is a good likelihood that things will occur after you purchase a house. I'm not saying that these items will be house related, but you need to ensure that you can pay for that car repair, plane ticket, or anything else that comes at you unexpectedly.

Buying a home will likely be your largest commitment in your life. With marriage's getting shorter, a 25-year mortgage is a hefty burden and it becomes a larger burden than most marriages, financially and in terms of length.

Lawyer fees

The other day someone had asked me about lawyer fees on a real estate purchase. This is a bit of a tricky area. It's sort of like the Southwest Airlines commercials. You know, the ones where the guys are scuba diving when one of the men realize that is no oxygen tank, and finds out after he's under water that there was an extra charge. There are always extra costs to consider.

First, I was charged $400 by my lawyer, but that did not include many of his disbursements. Some lawyer's may include their disbursements in their quotes, so the quotes can differ quite a bit. When I went for a mortgage, the mortgage broker had estimated costs of about $1400 for a lawyer. I am assuming that this amount included many of the disbursements. All in all, I paid about $1000 for all of my legal work. This includes title registration and other various things lawyer's do. I recommend that you budget for the worse (say $1400) just in case, but realistically it should be less if you have a decent lawyer.