I remember a lot about buying my first home. Some memories are more vivid than I would like. Overall, the experience was a very positive one, but I have to say, it was a whirlwind. At the time, I was working at Blackberry full time and bartending part time. I was young and inexperienced, but I knew I wanted to start investing in real estate and stop paying rent. I didn’t do a whole lot of research before we decided where to buy. I knew which neighborhoods I liked, so I started cruising Realtor.ca for homes. The homes in the neighborhoods that I liked were priced very high (shocking, I know…). It was a co-worker that suggested that we check out model homes in Breslau, where she had built. We walked into the model home, and we were instantly sold. The only question was, could we afford it? We hadn’t been pre-approved at this stage and had no real idea about how much we could qualify for. It turns out we could get enough to buy into this neighborhood.
The rest unfolded fairly smoothly, but because we didn’t have an agent at the time, we weren’t prepared for a lot of what was to come. The builder’s agent was great and helped us a lot, but we didn’t start dealing with him until we decided that we wanted to build with this builder.
The bottom line is, we really didn’t understand all of the costs and all of the savings associated with being a first time home buyer. We also didn’t understand what it was going to feel like to pay a mortgage, property taxes, utilities, maintenance etc. as opposed to paying an all-inclusive rent.
I found that there was, and still are, a lot of people out there that want to scare you out of doing something, or “prepare” you for all of the negative things to come. I remember clearly my brother coming in one night when I was working at the bar. He knew that we had put a deposit down with the builder and were moving forward. He proceeded to give me the gears about how we couldn’t afford that house, how we were going to be mortgage poor, and how we had no idea what we were getting ourselves into. I trusted my big brother at the time, and thought ‘maybe he’s right – do we really know what we’re doing?’. Well, he was wrong. As my fiancée at the time pointed out, we had worked out the budget many times. We were easily saving a significant chunk of money each month, which would far exceed the increase in our expenses.
It worked out for us that even through our various career and life changes since we bought, the house expenses have been very manageable. In fact, there have been a number of times where we both thought ‘we should have built a bigger house!’
What I also didn’t realize during the stress of buying a home from a floor plan, picking all of the finishes, and trying to navigate through everything from beginning to end was how great it is to be a first time home buyer.
One major commodity that first time buyers typically have on their side is time. In most cases, we find that our first time buyer clients are either paying rent or living at home. It is also often the case, as it was for me, that the rent is significantly lower than what you can afford to be spending on housing on a monthly basis. This makes it easier to save for a down payment. Living at home is the ultimate advantage, as most parents charge little for rent, if anything at all. This allows buyers to save, and save at an accelerated rate. This is where the pre-approval comes in, and is very important. The pre-approval not only lets you know how much mortgage you qualify for, but gives you an idea of what your monthly payments are going to be. You can then calculate how much of a down payment you need, and either start, or continue to save for that. As a realtor, when starting to work with buyers, one of the first big questions to ask and understand is ‘what is the budget?’ Often times, buyers have an idea of either what they want to spend on their first home, or what they will likely qualify for. My follow up to this is, ‘what do you want to spend on a monthly basis?’ , to which I mostly received puzzled stares. Buyers know roughly what they want to spend or are able to spend, but have no idea what they actually looks like on a monthly basis. Some buyers have worked out a monthly budget, but it usually doesn’t line up close to what they want to spend on a house. I had a buyer tell me recently that she wanted to spend $350,000 on a house (with 5% down), and wanted the monthly expenses to be around $1,500 all in. That amount is not remotely close to what it would cost to carry a $350,000 house.
The lesson: Get that pre-approval done and know your numbers inside and out. Track your spending so you know exactly how it will feel when you have more expenses, and thoroughly enjoy having lower expenses. Take full advantage of the time on your side.
Along the same lines, another great advantage that first time buyers typically have is flexibility. When living at home or renting, there is usually a much higher level of flexibility when purchasing. This can really work to your advantage during the negotiation process. Many times, the sellers of the home that you are purchasing, need a certain closing date to be accommodated. Perhaps they’ve already purchased a home, or they need time to find a home to purchase. If you can be flexible with closing, often times they will be more flexible with either the price or the inclusions (appliances, maybe they have furniture that you like, etc).
The lesson: The more flexible you are, the more you are likely to get in the end.
The term ‘closing costs’ is often thrown around, and I find most first timers don’t actually know what we mean by that. Closing costs are just that – the costs associated with having a transaction close. Depending on the lender, a home appraisal may be ordered. This cost lies with the buyer and is typically around $350. Legal fees do cost a bit more on the buy side – between $1,200-$1,600 is typical. Land transfer tax is always paid by the buyer. Another great advantage that first timers have is getting a partial, and in some cases full refund on the land transfer tax payable (depending on the value and location of the home). First timers are eligible for a refund up to $2,000. For a detailed breakdown of how the refund works, and to make sure you qualify, click here:http://www.fin.gov.on.ca/en/refund/newhome/
Although it’s not a closing cost per se, a home inspection is strongly recommended, and the going rate is around $450 for a single detached home.
Insurance is another cost, and there are 2 types of insurance for a property. The first is Title Insurance. Title Insurance is a one-time fee paid on closing, and will protect the buyer from any undetected title defects. This can include fraud and forgery of the title, encroachments on your land, zoning non-compliance, and easements. Title insurance in this price range will be around $325.
Just like a car, every home also needs to have insurance. Once the buyers take possession of the home, it will need to be insured. Monthly rates will be around $60 for a $300,000 house. Call your current insurance company and see if you can get a bundled rate.
There is also a first time home buyer tax credit that you can get when you file your tax return. Find out more about the submission process here: http://www.cra-arc.gc.ca/gncy/bdgt/2009/fqhbtc-eng.html
The lesson: We tell buyers to estimate that they will need 1.75% of the purchase price for closing costs. With the land transfer tax credit for first timers, this typically works out to more like 1% (but save the 1.75% anyways!). Not only are there tax credits for first time buyers, it also doesn’t cost buyers anything to be represented by and agent. The seller pays the commission for both the sell and the buy side of the transaction. As a buyer, you get to be represented by a professional, and you get their knowledge and expertise for free.
BONUS Lesson: Family and friends are very nice to you when you buy your first house. Everyone is excited – take full advantage of this, because it may not happen again. Have friends and family help you move, paint, build a fence, dig a garden – whatever needs to be done. When you are making more money, and want to trade up, I can guarantee that a lot more people will be ‘busy that day’ and any other day you may be looking for help.
Buying your first home can simultaneously be stressful, exciting and scary. The key is to understand the process, and have a professional on your side to navigate you though. During those stressful and scary times, take comfort in knowing that buying your first home will likely be the easiest and cheapest real estate transaction you will be a part of. Once you have to sell a house, to buy another, things do get more complicated. The question of whether you buy first or sell first is a tough one (and one that will be addressed in a subsequent post). Understanding the benefits and the process will make the transaction more enjoyable and hopefully less stressful.