There is little doubt that buying a home can often be a difficult-to-understand process. It is our hope that the following brief information may be helpful in clarifying some of the important aspects of home purchases.

Of course, one of the most important aspects of buying a home involves an accurate determination of the home’s monetary value. There are generally two ways of determining a home’s value – a market value analysis or an appraisal.

In the case of determining a "market value," the typical course of action is to discuss the prospective home’s value with your realtor. They will generally be able to use a combination of knowledge, experience, and statistical information to determine the value of the home you are considering purchasing. Such a determination will take into account various factors, including the value of homes that have been recently sold in your prospective neighbourhood. This is often the preferred method of setting an appropriate price for a property, particularly if the assessment is made by an experienced relator.

With appraisals, the determination of a home’s value is somewhat different. In this case, the process is somewhat more ‘methodical,’ and is conducted by a highly-trained (and typically licensed) professional/expert who is termed an appraiser. As in the case of determining a "market value," a substantial quantity of factors are used by the appraiser to set a value on a home. These include an analysis of the area’s real estate market, proximity to other areas such as schools and commercial districts, home age and condition, home size, and a variety of other elements that may affect a home’s value. Moreover, appraisals often also serve the role of protecting lenders ( i.e. in the case of mortgage properties), as it gives them assurance as to the true value of a home for which they are extending financing. Notably, as a professional service, appraisals entail a fee – current prices are approximately $300 on a home valued at $250,000.

Although you may buy a home for a certain agreed-to price, that is rarely the end of the situation in terms of the total cost; there are typically a wide variety of additional fees, commonly referred to by the collective term "escrow & closing costs" that also must be paid. It is useful, however, to first understand the concept of escrow itself, to better understand the nature of the fees referred to.

In addition to the fee charged for escrow services, there are many other fees related to closing (i.e. closing costs). Before moving on to a few specific examples, it is important to note that in many cases, there is never complete certainty as to which party (i.e. buyer or seller) has to pay some the specific fees (or if they are shared), because such is a matter of custom that varies from state-to-state and region-to-region. Regardless, some of the typical fees a buyer may face, particularly if they require a mortgage to finance their purchase, include:

• The down payment itself – typically at least 10% of the purchase price, although some programs allow as low as 3 to 5% (and with excellent credit plus mortgage insurance, 0%). 
• Loan origination fees (again, typically the buyer’s responsibility) – a fee charged by the lender to establish a new loan; usually in the range of 1% of the purchase price. 
• Appraisal fees – these are discussed above. Credit Report fee – typically obtained by mortgage lenders at the prospective buyer’s expense. 
• Tax Service Fee – a fee charged by tax service companies to verify, to the buyer’s lender, that property taxes have been paid. 
• Assumption Fee – a fee charged by a mortgage lender if you assume the mortgage loan of the previous owner. 
• Pest Inspection Fee – to ensure termite or other wood-eating insects have not caused damage to the property and/or to ensure there is no current pest activity. 
• Home Inspection Fees – this is discussed in more detail below. 
• Extended Title Insurance – typically required by lenders, to cover unrecorded liens on the property being purchased. 
• Municipal Transfer Taxes – sometimes charged as a percentage of the property’s assessed value, and paid to the municipal (i.e. city) government. 
• Notary, Document and Other Fees – these are quite typical with any type of complex business transaction, such as purchasing a home. 
• Mortgage Insurance – protects the mortgage lender in case of default (typically this fee occurs if the down payment is less than 20% of the home’s purchase price).

Finding the Right Home

Finding the correct home that meets your budget, requirements, and goals is a process that depends very heavily on the services of a skilled realtor. From what is in almost all cases an overwhelming quantity of potential properties, realty professionals are highly adept at ‘filtering’ the list of prospective properties to one that is both manageable and an excellent match with your individual requirements, even if you are only seeking investment property and not a home that you wish to live in yourself. Remember – it is the duty of good realty professionals to determine a very workable base profile of the types of property you are interested in purchasing and capable of procuring, simply by asking questions and communicating with you. In other words, with the assistance of a realtor, finding the perfect home can be a surprisingly (and thankfully!) easy experience.

If one is particularly interested in a property, it is often good practice to request a home inspection of the subject home. The standard practice is for this to be conducted upon receiving permission to do so from the home’s vendor. Home inspection is often tied into an offer, as a condition (i.e. an offer on a home is often made ‘pending [the outcome of a offerer-selected] home inspection’).

The role of home inspectors, although generally quite straightforward, can be an integral aspect of the home purchasing process. Similar to appraisers, home inspectors are trained professionals, often with a lengthy background in contracting and/or (structural) engineering. They are very adept at detecting any possible significant problems with the home’s structure, the property itself, and other ‘systems,’ such as heating, cooling, electrical, plumbing, and sanitation. Also typically addressed by home inspectors are any possible health hazards, such as asbestos.

When selecting a home inspector, it is definitely a good practice to assure they are reputable. This can oftentimes be easily accomplished by selecting a member in good standing of the American Society of Home Inspectors (which ensures its members both maintain an exceptionally high ethical standard, and are experienced inspectors). For inspections of properties located outside of the United States, similarly reputable professional bodies often exist.

Much like warranties on common products, large and small, warranties are available for homes, to protect against possible (and often costly) defects in workmanship of various of the home’s appliances and fixtures. Although every home warranty varies, they typically cover the repair (and sometimes replacement) cost of items such as:

• Heating and Air Conditioning Systems; 
• Ventilation Ducts and Fans; 
• Plumbing Fixtures, such as Sinks, Toilets, Bathtubs and Showers; 
• The House’s Internal Plumbing and Electrical Systems; 
• Major Appliances Such as Washers/Dryers, Ranges/Refrigerators, and Dishwashers; 
• Garbage Disposal Systems; 
• Garage Door Openers; 
• Pool / Spa Equipment;

Sometimes also included are warranties on significant structural components, most commonly the house’s roof. As a buyer, a good home warranty can be a definitive asset, and help provide certainty in purchase decisions. However, not all home warranties are made equal – with the assistance of your real estate agent, you can more effectively determine if the terms of the warranty are appropriate to your particular needs and buying situation.

Insurance related to the purchase of a home is an incredibly vast topic in and of itself. Many of the types of insurance you will deal with, such as mortgage and title insurance are discussed above, in the section on closing costs. Nonetheless, when looking to buy a home, you should also consider various other types of insurance, particularly after the deal closes. Among these are life insurance policies, home contents and property insurance, and possibly even flood insurance. Your real estate agent can assist you in determining the types of insurance you should consider, and can refer you to insurance experts should the need arise.

Lease Options

Even if it is not possible for you to immediately come up with a down payment and sufficient funds to cover closing costs, it may still be possible for you to reside in your dream property. Many sellers are sometimes willing to enter into lease-option arrangements, whereby a prospective buyer becomes the home seller’s tenant, renting the property while retaining an option to buy the property within a certain time. Typically, the rent will be above the typical market rate, with a certain portion of the rent allocated as "rent credit" towards a down payment. A variation on the theme involves lease-purchase arrangements, where the renter is obligated (rather than simply having an option) to buy the property, typically at the end of the lease term.

A variety of benefits are possible to prospective buyers under such arrangements. These include:

• Cash required up-front in a lease-option is generally low – typically the first month’s rent plus a non-refundable option consideration – and often only a few thousand dollars. This amount is typically much lower than a down payment. 
• Monthly rent isn’t "thrown away" – the rent-credit factor is an extremely important one, in that it assures that monthly rent simply isn’t enriching someone else’s investment portfolio – a portion of the monthly rent enters into a sort of "forced savings account" arrangement, to save for the down payment on the property. 
• Property can be controlled with very small quantities of money – controlling property and profiting from increases in property market value can be accomplished quite readily through lease-option arrangements, particularly if the prospective buyer can negotiate a longer (i.e. greater than 24 month) lease-option term.

Of course, before purchasing any property, one has to make an offer to the vendor. Although a proposed sale price is a factor to such an offer, there are a variety of other considerations. An (informal) offer including these other factors is sometimes referred to as a proposal. Although not a formal contract, a proposal usually sets out, in some depth, specifically what the prospective buyer would like to see in a formal sales contract.

Good real estate agents will assist you in most aspects of preparing a written proposal to present to a vendor. Typically addressed in such a proposal are:

• The proposed purchase price of the property 
• Possibly, the sellers’ commitment to assist with the down payment 
• Any important contingencies, such as if the purchase price is contingent upon the installation of a new furnace, or an independent home inspection

If the seller accepts the proposal, the process usually proceeds to the drafting of a formal contract. Many of the items discussed in the proposal are thus formalized. These include:

• Again, the purchase price of the property. 
• Terms of sale, including all items pertaining to down payments and mortgage conditions, including how the down payment will be paid, and how it will be refunded if the. transaction ultimately is not conducted. 
• Address and full legal description of property. 
• Terms binding the seller to concede legal title of the land upon closure of the transaction. 
• Contract finalization date(s), including a date that if passed, renders the contract null and void. 
• Terms pertaining to the transfer of utility and other bills associated with the property. 
• Terms involving who is responsible for payment of any property inspections. 
• State or Province-specific terms, required to make the contract legally binding in the property’s jurisdiction.
• Any requirements pertaining to the need for a lawyer/attorney to review the contract. 
• Terms related to required disclosure of any hazards.

Of very major importance is that any sales contract should also fully specify any contingencies that would act as ‘deal breakers.’ The most common contingency makes a sales contract subject to the buyer receiving financing for the purchase. Another increasingly common contingency involves the contract being subject to a home inspection (i.e. to ensure that other terms, such as the promised repair of a furnace) have been complied with. Also very common is that the purchase is subject to the proposed buyer selling their own property.

Remember – a well-drafted sales contract can oftentimes protect against costly legal expenses or other serious and stressful problems should something go wrong within the transaction process. It is thus of very high importance that buyer and seller alike assure that all expectations and contingencies are covered within the terms of the contract they enter into.

Admittedly, negotiation, particularly in terms of real estate transactions, if often more of an art than a science. It is, like many other things, also an area where the guidance of an experienced real estate agent can make a huge difference – in terms of both success and in terms of saving money. Before considering a few other aspects of the process, it is important to keep in mind a few tips:

• Try to take a negotiation approach that balances being flexible, while avoiding being overly accommodating. 
• Attempt to ensure that you are in the best position possible before making an offer. It’s highly advantageous if you are willing to pay cash for the property (or have any necessary financing pre-approved by your lending institution), and if the sale is not contingent on the sale of your own home/property. Often this can give you a decisive advantage, particularly if other offers are close to yours (but do not have financing in place or have other conditions).
• Learn why the seller has their property on the market, as this can often be a helpful guide in determining the direction to pursue in negotiations. A variety of factors can make negotiating a good deal more or less likely; non-motivated sellers are of course often more difficult to strike a bargain with than those who desire to sell their property more quickly, such as due to recent divorce, job-transfers, estate settlement, or other factors. 
• The assistance of an experienced real estate agent can also be decisive – their guidance can help you immensely, particularly if negotiations become difficult, or if competition for a specific property is particularly high.

A few other aspects to negotiating and closing a deal are worth consideration. First, it is not necessarily uncommon that your first offer (or even your second or third!) will be rejected – even if it is close to the asking price. The property vendor will, very often, provide a counter-offer to your first offer (and sometimes to several of your subsequent offers). Second, you should always discuss with your real estate agent (and perhaps even your attorney) the laws involving offers – although you are usually free to withdraw an offer prior to its acceptance, you may become legally bound should the offer be accepted. Third, recognize that there are often a few other factors that may come into play as well – for example, there may arise the need to pay "earnest money," a type of ‘deposit’ to ensure exclusive negotiation rights for a set time (and later set off against the down payment). There may also be the need to pay other fees, such as those required for inspections, some of which may not be refundable.

Yet another important element to consider when purchasing property are property taxes. Typically charged annually by municipal or regional authorities, property taxes are typically based on the (government) assessed value of your land and its improvements ( i.e. whatever is developed on the land, such as houses, garages, sheds, etc). These can often be significant, and are almost always taken into consideration by lenders when they choose whether to extend mortgage financing for a prospective borrower to purchase a property. Fortunately, most lenders arrange for property taxes to be added, pro-rata, to mortgage payments (i.e. 1/12th of expected property taxes are added to each monthly payment, and held in an escrow account until taxation time each year), so property owners are not stuck with a very large expense, all at once, each year.

An often not carefully assessed aspect of purchasing a home involves (income) tax considerations. Although most individuals know that income from properties is of course taxable, many are not aware that there are often a variety of tax advantages available to home owners. A few of the details are summarized below.

It is often more advantageous to avoid filing your personal income taxes on so called "EZ forms," and instead use the 1040 Long form / Schedule A, to enable the itemization of deductions. It is definitely worthwhile, as a home owner, to determine if the amount you can deduct by an itemized method is greater than the standard deduction based on your filing status (i.e. single, head of household, married). Some possible deductions include:

• Mortgage interest – for loans less than $1M, all mortgage interest is deductable. This may even extend to equity debts, such as secured lines of credit, subject to certain rules. 
• If you paid points to obtain a lower interest rate on any of your home loans, you may also be able to deduct these, in the taxation year they are paid. 
• Property taxes are also generally deductable too – provided you are careful only to claim those taxes which are paid to taxation authorities in the taxation year for which you are filing a return.

Unfortunately, some things are not deductable. These typically include:

• Insurance, such as private mortgage insurance, isn’t deductable – even if it’s required to be paid as a term of obtaining a mortgage. 
• Other expenses, such as homeowner association dues and home depreciation is generally not deductable. 
• Repairs, unfortunately, are not generally deductable either – although keeping your repair receipts may be useful, as it could lower the cost basis of your home down the road, and thus reduce any tax on profits you may incur in the event that you sell your property.

Perhaps one of the easiest experiences in any property-related transaction is working with your real estate agent. An experienced agent will not only know the industry and the market, but will also quickly know how to adapt their style to match yours. After all, the primary reason for hiring a real estate agent to assist and represent you is to have an expert-level, trusted ally in the process. Any question related to property, the market, or specific transactions you are involved in, can and should be presented to and answered by your agent. Flexibility is also a keyword; quality real estate agents will be willing to work around your schedule and constraints – thus you need not and ought not ever feel pressured for time, nor feel uncomfortable in making inquiries about any part of the real estate process.

When you are looking for a qualified, reputable, reliable real estate agent, we invite you to contact us. We definitely know the business – with over eighty-six years of combined experience in the industry. We are proud to offer all of our clients a truly superior realty firm – constantly focussed on ensuring excellence, and surpass all our clients’ expectations.

We are also a full-service Real Estate firm, meaning that we can assist you in all aspects of purchasing property, be it a home, a condo, commercial property or bare land. We are also widely connected to the international Real Estate market, providing our clients with access to properties from North America spanning the globe to Oceania.

We invite you to contact us today.