WELCOME TO CANADA
If you are new to Canada and are looking to buy your first home, the steps would be the same
as for any Canadian and starting with the right Real Estate Agent and Mortgage Agent.
Buying a first home is very often a challenge for most Canadians, and so it can be even more of a challenge for an immigrant who hasn’t yet had an opportunity to establish good Canadian credit or employment history. And even if lucky enough to be able to purchase without the need of any financing, there is still the uncertainty of what to buy, what areas to look for and which to avoid, what is a good price, and how to protect the Buyer and ensure the property is properly transferred to the Buyer’s name.
Most properties in Canada are bought and sold with the help of a real estate agent and there are a number of real estate brokerages available to select from. A good suggestion is to call a few agents and arrange to meet with them so that YOU can INTERVIEW THEM. Yes, you want to see if they are the type of person that will listen to what type of home you are looking for, besides being an expert in the area where you are looking to buy. In other words, do you LIKE them and feel that you can TRUST them to look after your best interests?
Real estate agents are typically paid by the Seller of the property and so the Buyer has the benefit of using the services of a real estate agent without any direct fees to the Buyer. So why not take advantage of it? There are about 30,000 licensed real estate agents in the Greater Toronto Area (GTA) so it makes sense to be picky and select an agent that you feel comfortable with.
Agents in Toronto belong to the Toronto Real Estate Board (TREB) which in addition to licensing the agents and making sure that ethics and rules are complied with, TREB also administers a data base of properties available for sale known as the Multiple Listing Service (MLS). Every year there are approximately 100,000 properties sold in the GTA and over 90% appear on the MLS and sold through a real estate agent.
Another important suggestion in ensuring success in your home purchase is to seek the advice of a Mortgage Agent who will assist in getting you a mortgage if you need one. A Mortgage Agent has the distinct advantage over your local bank in that they can shop for the best deal for you at over 40 different lending institutions whereas your bank representative will be able to fit you within the guidelines of their lending policies and if the mortgage amount or terms is not acceptable to you, you have to start the process all over again with another bank. A Mortgage Agent looks at all the options with just ONE application from you saving you time and money by finding the lowest possible rate.
In summary, if you are new to Canada and are looking to buy your first home, the steps would be the same as for any Canadian and starting with the right Real Estate Agent and Mortgage Agent. As an accredited Real Estate Buyer's Agent and a Mortgage Agent I am able to help you locate, negotiate, finance and purchase your home.
INVESTING IN CANADA
For most Canadian immigrants, their first real estate purchase is their family home. After they have lived in it for awhile and have had an opportunity to learn and familiarize themselves with the city, they then begin to look at additional purchases of residential or possibly commercial, office, hotel or industrial properties.
Financing
Whereas financing for a residential property like a single family house or condominium is relatively easy and the Investor can buy with as little as 20% down (and 80% of the purchase financed through a mortgage), when it comes to other property types, this usually changes and requires that the Investor have a greater down payment i.e. 30-40% for commercial or industrial and sometimes more such as 50% as in the case of vacant land.
Rates of Return
The rate of return on a real estate investment can be measured in terms of what is often referred to as Capitalization Rates or simply Cap Rates. Arithmetically they are calculated as the net income after all operating expenses generated from the property (after all operating expenses such as heat, hydro, water, realty taxes, management and insurance).
The Cap Rates vary not only according to property type, but also to condition of the property and the location. As an example, while a well located property in good condition with good rental income may demand a Cap rate of 5-7%, another property in a less desirable location and needing work with some vacancies may be available for purchase at 7-8%.
Places to Invest
It often makes sense to invest in the same city or at very least very close to where you live (at most one hour’s drive). Primary cities like Toronto with a population of 5.5 Million and the financial hub of Canada are a safe bet, but increasingly investors are looking at secondary hubs like Hamilton, Kitchener, Waterloo and Barrie for example, because of their better returns.
Within Toronto, there are areas that are established and highly desirable and therefore the real estate values reflect this. These areas appeal to risk-averse investors and those who seek safety in proven AAA locations. There are other areas meanwhile that are in transition and emerging as the next “hot spots” that typically attract the attention of investors who are more risk tolerant and see the area not as it is, but as it will become and are willing to participate in its transformation by buying properties and either completely renovating or else building new. Often times, just by holding onto a property in such transition areas, even without performing any work to it, will see an above average appreciation over the rest of Toronto.
TYPES OF HOMES
There are basically three forms of property ownership in Toronto, Canada: 1) freeholds 2) condominiums (or strata titled in British Columbia), and 3) co-operatives.
FREEHOLDS
Freeholds are a form of ownership where the title holder is 100% owner and does not share any component of the property with anyone else. This is the preferred form of property ownership for most Canadians and includes property types such as detached, semi-detached, and freehold townhouses (to differentiate from condominium townhouses). Part of the reason for the preference is that with freehold ownership, the home is located on a parcel of land with a front and backyard which is a culturally desirable feature in house.
CONDOMINIUMS
With Condominiums, the title holder has 100% ownership of their condominium unit, but also a proportionate share of the common elements (such as front lobby, landscaping, gym, swimming pool, etc) and therefore, is also responsible for a proportionate share of the maintenance and upkeep of those common areas. This proportionate condominium expense to each condominium owner is known as the Condominium Fees or Condominium Maintenance Fees which for a typical condo in Toronto can range from $300-$1,000 a month depending when the building was constructed and how amenities the building offers. Buildings with swimming pools and 24 hour security concierge desks tend to have the highest condo fees. This may or may not include all the utilities and realty taxes so it’s wise to ask what exactly the fees include. Condominiums are mostly in the form of high rise apartment condominium buildings but lately, with the demand in particular by a growing number of seniors who want to live in their freehold homes but who either are not physically able or willing to do the landscaping work (lawn/garden care in summer and snow removal in winter) are buying into condominium detached houses and condominium townhouses. Condominiums in Toronto tend to be selected for a variety of reasons but perhaps the two most common: 1) Financial - by first time buyers because condominium apartments are generally lower priced than houses, 2) Social - by single or retired people because they don’t require as much space as a family and so a condominium apartment is fine for their needs.
CO-OPERATIVES
Co-operatives comprise a very small and insignificant portion of the ownership in Toronto. Each co-operative owner doesn’t own their condo apartment unit, but rather a proportionate share of all the units and all the common areas. So for example, in a building with 100 units, each owner would own 1% of the entire building which includes all the 100 units as well as all the common areas. Co-operatives are not very easy to finance which is one reason they are not very popular.
MAKING AN OFFER
Once you have identified the home that you would like to buy, your Buyer Real Estate Agent will prepare as part of their service and at no charge to you the legal document known as the Agreement of Purchase and Sale or simply the “Offer” which contains all the details of the purchase.
You will have the option to buy the property in your personal name, or with your spouse, partner, or in a company name or corporation that you have created. Most Canadians buy their home in their personal names, but if you have any concern which is better for you, consult your lawyer or accountant. If the home is to be your principle residence, then there will be no taxation on any price gains or profit you may make when you eventually sell. This is known as the “Principle Home Exemption” and has been in effect in Canada for decades.
With the Offer it is customary to include a Deposit which serves to show that the Offer is being submitted in “good faith” and intentions by the Buyer. As such, the Deposit can be any amount and it is not specified what amount it should be, but a general guideline is 2-5% of the purchase price and rounded up.
The Offer is always submitted with an Irrevocable Date which is the date and time that the Offer is no longer in effect and legally enforceable. The amount of time given to the Seller to respond to the Offer is a matter of strategy but a general guideline is from as little as a few hours to days, but usually 24 hours is sufficient mindful that it doesn’t fall on a Holiday.
To protect the interest of the Buyer, the Offer should include two critical Conditions: 1) Condition on Financing and 2) Condition on Property Inspection. There is actually a third, but that’s specifically in addition to the other two in the case of condominiums and is referred to as 3) the Condition of Status Certificate Review.
The Condition on Financing will be important to protect the Buyer in the event the Buyer cannot either arrange the mortgage amount they need, or at the terms that are acceptable to the Buyer. A properly written Condition on Financing clause would enable the Buyer to decide in the Buyer’s “sole and unfettered discretion” whether the mortgage was acceptable to the Buyer. If not, the Buyer would simply not respond to the Offer and it would automatically terminate. In other words, a properly written Condition on Financing clause will automatically terminate after a certain number of business days (say 5 or 10) unless the Buyer steps in with what is known as a Waiver. The Waiver essentially dismisses the condition and eliminates it from the Offer because the Buyer has satisfied themselves that Financing is no longer a question or issue for the Buyer.
The Condition on Property Inspection is also written to automatically terminate unless the Buyer provides a Waiver. Usually the two conditions are written to be co-terminus or terminate at the same time and date. The Buyer agent should be able to recommend 3 qualified and proven property inspectors that the Buyer Agent has used before and the Buyer would then select one. The fee is approximately $400 and the 2-3 hour inspection is completed with a detailed written report to the Buyer. If the property requires more detailed inspection in any given area ie foundations, roof, or furnace, the Buyer Agent should be able to provide a list of specialists that the Buyer could then call upon. Apart from giving the Buyer peace of mind that an unbiased third party has examined the property, if there are any issues identified because of the property inspection, this can usually be probable grounds for a renegotiation of the purchase price.
In the event of a condominium, the third condition that would exist is the Condition of Status Certificate Review and essentially requires that the Condominium Corporation prepare the financial statements for the past fiscal year and make them available to the Buyer for their review (actually, because of its complexity most Buyers have their lawyers review it and advise them on its content). Typically, the clause requires that the Status Certificate (which can be as thick as a binder) be prepared within 10 business days and then the Buyer (or the Buyer’s lawyer) has 2 business days to review.
GETTING HELP
Buying a home in Canada can be a lot of work and requires that you do your homework, or at very least, you have professionals that you can trust to represent your best interests in the purchase of a property. Here is an overview of the real estate professionals that you should engage in helping you with your real estate purchase.
Buyer Real Estate Agent
Real Estate Agents in Canada are typically compensated with a fee that is calculated as a percentage of the property’s sold price. The Seller of the property typically pays the fee to the Buying Agent as well as the Selling Agent and the fee is usually split on a 50/50 basis.
As already detailed in another section here, it is recommended that before you start driving around and calling real estate agents from various listing signs to view homes that you take time to engage the services of ONE real estate agent you feel you like and can trust. Real estate agents are compensated by a successful sale and so you will get better representation from one real estate agent who knows you are engaging them exclusively than from several agents that you are just talking to gather information but with whom you have no commitment.
To start, find out if they primarily work with Buyers (ie a Buyer’s Agent) or work with Sellers (ie a Listing Agent). In most cases, there is no cost to you in engaging a Buyer’s Agent since the Seller of the property that you buy will be paying both the Selling and the Buying Agent as is customary. Although calling the agent on a listing or a sign will still get you the information you desire, be aware that if you don’t have a Buyers Agent, they will then dy default become your Buyers Agent and be collecting both the Selling and the Buying fee - but you are not getting an agent to represent you as Buyer. And the Listing Agent already has a fiduciary obligation to represent the best interests of the Seller, so then who is looking after your interests as a Buyer in the purchase? Get a Buyer’s Agent to represent YOU!
Real Estate Lawyer
When you and your Buyer Agent have found the property that you like and would like to buy, your Buyer Agent will create the legal document called the “Agreement of Purchase and Sale” or simple the “Offer” and go over all the details of the purchase that you wish included such as the price you wish to offer, the date you will take possession, and conditions you may require (such as Financing or Property Inspection which are recommended), and any items in the property that will be included or excluded, etc.
As when you selected your Buyer Real Estate Agent and interviewed a few agents, why not do the same with a few select real estate lawyers? It’s important to select a real estate lawyer rather than one that specializes in other areas of law such as divorce, criminal or environmental law, for example. The typical fee for a lawyer for an average home in the GTA would be in the range of $1,200 to $2,000 which includes the lawyer’s professional fee plus all disbursements. The lawyer will typically ask for at least two weeks (and ideally more time) to review all paperwork and properly review the title of the property you are buying and register your name as the new owner. A day or two before the actual transfer date also known as the Closing Date, the lawyer will request that you as Buyer come down to their offices to sign all the necessary paperwork.
Property Inspector
After having identified a property that you like, and after you have submitted and negotiated an offer that has been agreed to by both the Buyer and Seller, the Offer usually makes provisions for the Buyer to be able to have a professional Property Inspection. The Buyer selects a Property Inspector (the Buyer Agent can recommend a few) to do a thorough inspection of the property which can take 2-3 hours and at the end gives the Buyer a complete and candid report on the condition of the property including any issues that may require immediate or eventual repair or replacement.
This gives the Buyer an unbiased third party account of the property’s condition and the Buyer can then decide to 1) continue with the Offer, 2) terminate the Offer and have the Buyers deposit returned with no penalty or deduction or 3) renegotiate the price in light of the property inspector’s report should there have been any defects identified of significant cost to remedy. This in itself can help offset the property inspector’s fee (of approximately $400) many times over. If nothing else, the report gives the Buyer an added level of comfort that they are not buying a property with potentially costly problems.
CAUTION: RENT TO OWN FOR THE NEW IMMIGRANT
When a Home Buyer is not able to qualify for a mortgage and doesn’t have the down payment, but desires to buy a home today rather than wait, one possible solution is Rent To Own or RTO. Much has been written on this and was a hot topic among investors particularly in 2009 and 2010 and there were many investors offering them each with their own twist on the theme.
The targeted Home Buyer for an RTO was someone with poor credit: someone who had gone through a divorce, a bankruptcy, or was self employed in a cash business and couldn’t prove their income and hence in qualifying for a mortgage. And of course, there are recent Canadian immigrants.
It is recent immigrants that need to be especially cautious of this seemingly attractive strategy to purchasing a home. Recent immigrants are less likely to understand the typical Canadian home buying and mortgaging process and so there is the potential by unethical investors to mislead them. Also, statistics show that well over half of immigrants buy their first Canadian home within the first five years of arriving in Canada. This is a higher rate than that for native Canadians and again, there is the potential for abuse by unethical investors.
RTO’s may be of value in certain select cases, but in general, they are not a prudent choice for the Tenant/Home Buyer.
Here is a simple example of how it works.
Let’s suppose John and Susan recently immigrated and want to buy a home. They have a down payment, but because they are new to Canada and don’t have any Canadian work history and therefore don’t have Canadian credit history or rating, they cannot qualify for the mortgage amount they need. They feel that they want to buy a house today rather than wait because they believe paying rent is a waste of money and besides, they can’t find a suitable rental accommodation. John was an engineer and Susan is a school teacher so they are confident that they will soon start earning good incomes and generate favourable credit reports.
Here are some numbers:
Monthly Payments: $3,000 (comprised of $2,300 in rent and $700 in monthly credits)
RTO Term: 24 months
Purchase Price of Home: Although the home they want may have a market value of $400,000 today, the Seller imputes a annual rate of increase of 5-10% (a figure arbitrarily selected by the Seller and aimed to reflect expected increases in next 24 months) so the Purchase Price in 24 month’s time is agreed to $450,000
Down Payment: They’ll need at minimum a 5% down payment as first time home buyer’s so 5% x $450,000 = $22,500.
Deposit with RTO: At time of signing the RTO contract and before moving in, they put a deposit of $5,700
Repairs & Maintenance: Anything under $500 is the responsibility of John and Susan
During the 24 month term, they will have accumulated $700 x 24 = $16,800 plus the deposit they’ve given of $5,700 yields the down payment they’ll need of $22,500.
Here are the potential pitfalls and where this crafted RTO is not in the best interest of John and Susan as it ends up costing a lot more and exposing them to unnecessary risk:
- There is no assurance that they’ll be able to improve their credit rating sufficiently to qualify for a mortgage and the Tenant/Home Buyer is usually left on their own to figure out how and if they can sufficiently improve their credit rating and income in time.
- Even if they manage to greatly improve their credit by the end of 24 months, there is no assurance that they’ll have the income levels needed to qualify for the mortgage.
- If they can’t go through with the purchase at the end of the 24 months, they will be in default and risk losing their $22,500. In some cases, the Seller may be “nice” and extend the term by say another 12 months, but often this does little to help in the way of mortgage qualification and so they are still at risk at losing not only the $22,500, but now another 12 months at $700 = $8,400. Total = 30,900.
- RTO’s usually require that the Tenant/Home Buyer look after the maintenance costs even though they are not yet technically the owners. This would not be an issue if they were renting.
- The Seller imputes a growth factor on the real estate prices based on what’s happened historically. If the prices don’t increase at least as much as the agreed upon price of $450,000 after the 24 months, they will have over paid. And if there is no increase but rather a slight market correction, they will have lost their $22,500 because no lender will lend based on a $450,000 home when it’s worth significantly less.
- All in all, the RTO is a way for certain select Buyers to make their dream of home ownership a reality, but those numbers are few and far between. And in doing so, they would have to incur a high level of risk.
It may be that the better strategy is to live in a modest rental unit for the 24 months and then make the move to home ownership when the Buyer can negotiate a home at fair market value – or even below market if they can find a motivated Seller.
Like credit cards with very high interest rates and penalties, given to consumers with poor spending habits, the RTO is designed for the “now” consumer who can’t delay or postpone gratification and opens the possibility for unethical Sellers to purposefully seek out such Tenant/Home Buyers.
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© 2016 Edward Frezza, Broker for RE/MAX Professionals Inc.
