I regularly ask people what’s something they wish they were taught in high-school. One of the most common answers I get is how to buy a house. I’ll do my best to make this as easy and straightforward as possible.
For simplicity, I’ll refer to a house as property, hence we can incorporate apartments, townhouses, rental properties, condos etc.
Step One: Budgeting & Mortgages
Before you start looking for a property, you need to understand what you can afford. Are you paying for the property outright OR planning on getting a mortgage? The most common approach for first time buyers is getting a mortgage. If this is you, you’ll need to pay at-least 20% of a house’s value in order to get a mortgage. Here’s a simple example.
Sally lives in a town where houses cost on average $500,000. In order to qualify for a mortgage, Sally needs to have at-least $100,000 in her bank account.
Side Note: You can get a mortgage with less than 20% down BUT you will be charged with higher fees and higher interest rates, hence making your purchase much more expensive.
After assessing your net-worth, a bank will also assess your credit record and income. They want to see if you make enough money to afford the payments of a property AND to see if you have defaulted on any previous loans or debt.
Here are some mortgage basics that might be helpful…
A standard mortgage length is 25-30 years. This is how long before you own your property outright. Here’s a simple example.
Sally has a $1,000,000 home. So far she’s paid $250K in mortgage payments plus her initial $200K down payment. She has $450K of equity in her home, meaning if she were to sell the house, she would get that $450K +/- any appreciation/depreciation. At the end of the mortgage, she would have $1M equity in her home.
A mortgage will consist of a principal amount + interest. The early years of a mortgage will consist mostly of you paying interest. I’ve attached a link to a video at the end of the letter that explains this.
As a general rule of thumb, your monthly mortgage payments shouldn’t exceed 40% of your monthly pay. This part is a bit nit-picky but here’s an Investopedia article that explains why.
Once you know that you’ll be able to qualify for a mortgage, you can do quick a personal budget rundown. This is basically understanding that you’ll have more costs than just a mortgage payment. These include
property insurance
property taxes
property maintenance
moving costs
cost of living (if you’re moving to a new city)
Step Two: Knowing What You Want
The next step is understanding what you want. A house? Townhouse? Condo? Different types of properties will have different types of costs. A house will generally be more expensive than a condo or townhouse. You may even have a basement suite in your house that can be rented out. Highrise condo’s and townhouses will have lower property taxes but usually have maintenance fees that include gardening, use of gyms, pools, clubhouses etc.
A key note to consider is… some types of properties appreciate/depreciate less than others. Meaning, a house may increase in value more than an apartment or condo.
Step Three: Real Estate Agents
You can go solo and try to buy a property through a private deal but this isn’t recommended for newcomers. It’s best to get an experienced real estate agent who is well versed in the area you’re trying to buy a property in. Feel free to chat with a few agents before deciding on one. It’s also important to keep in mind that the agent doesn’t get his/her commission until you buy a property. Be-aware of an agent trying to rush a purchase or acting needlessly greedy.
Side Note: In most cases, the buying agents commission is paid by the selling party. You typically won’t have to worry about real estate agent fees as a buyer.
Step Four: You like a property, now what?
In your search for a property, your agent will show you many properties. Some properties will be less than your budget while others may be higher. Keep this in mind when making the final decision. You may be a shown a nice house that pushes your budget and in the long run those higher mortgage payments will become a headache.
Once you pick a property you like there a few things that will happen:
You and your agent will put in an offer. This offer will typically include terms and conditions (subject clauses) that basically say “hey, we’re interested but we want to inspect the property and do our due diligence first”. During this time, you will probably put down a standard 5% deposit while you go about your inspections.
Your agent will typically refer a home inspector but you can always get your own. Remember, experienced people are key, especially for first-time buyers.
The deposit you put down will be held in trust with a 3rd party (usually a brokerage that deals with the real estate agent). “In trust” basically means that no one can access this money until the terms and conditions of an offer (or pre-offer) are met.
If the home inspection meets standards, you’ll be ready to finalize the offer for the property. There will be some back and forth negotiating between parties but once you find a price agreement you’ll be very close to owning the property.
During this time, you will understand all the extra costs/incomes associated with your property. This includes basement suite income, insurance, property tax, utilities as well as any maintenance fees for condos, townhouses etc.
Step Five: Legalities
This is one of the most important parts of a property purchase. After you and the seller agree to an offer, there will be 3 stages until you can get the keys in your hand.
Adjustment Date
You finalize all financial agreements during this time. This includes the mortgage approval by your bank. Your lawyer and the sellers lawyer will go over the legal terms of the contract. If you’re buying a brand new property, you will need to add 5% GST to the purchase price. After the mortgage and financial contracts are approved by both parties, the money is put into a trust by your lawyer.
Completion Date
This is when the land title officially transfers over into your name. As this is one of the most important parts, this is where you bring in a lawyer. The lawyer will help you put “interest” (possession) on the property. The reason why this part is so important is because the land may have previous claims/lawsuits and you don’t want to pay for a property and then realize it doesn’t belong to you. The current property owner may not even know if their property has a claim on it, hence it is vey important you legally get the land title in your name. You can go to a land title office yourself but this isn’t recommended. A house is a big dollar value purchase, and thus it’s better to pay $1000-1500 to a professional lawyer who can make this process ALOT easier.
Possession Date
This is when you finally get the keys to the house. Your mortgage payments, utilities bills and insurance all start. The money that has been put into the trust will be released to the seller.
Here is a helpful link that lays out what a real estate lawyer does.
Step Six: After Moving In
Most property buyers will want to change the property in some shape or form after purchasing it. This includes renovations, furniture, decor and appliances. It is important to remember your budget when considering these things. It may also be useful to consider these costs when negotiating the price of a property. It is in your best interest to lower the purchase price of the property. If you’re buying a fixer-upper, then factor in the time and money required to complete renovations. Even $10,000 off the price of a property can help save for any furniture/appliance expenses.
Side Note: If you need to buy appliances, it is recommended to buy them brand new. Yes they won’t be cheap but a brand new appliance will give you less trouble than an old used one that may require repair. As for furniture and decor, do you what you like, but remember the costs can add up real quick so keep that in mind.
I hope this letter was able to simplify the process of buying a property. Always do your own due diligence and work with experienced people. Make sure you understand all legal contracts and financial commitments. Some people fail to understand how a mortgage works and that can be fatal for budgeting.
Here is a link to some informational mortgage videos by Sal Khan, founder of Khan Academy. This also includes a mortgage calculator that helps layout your expected monthly payments.
Remember, your bank is in business to make money for themselves, NOT for you. Ask as many questions as you can to your bank advisor. Sometimes bankers can gloss over details fairly quickly hence it’s imperative you listen and ask questions. Make sure you understand all the legalities of a mortgage contract.
I would also recommend giving this video a view. The speaker is a real estate investor who gives a visual breakdown of buying a home as well as some great tips. He also explains some finer details in his other videos which are great for general knowledge.
I’d also like to thank my friend Parbir Dosanjh, a real estate developer in Vancouver, for helping curate the information.
Thank you for reading the letter. If you have any questions, drop a comment and I’ll get back to you.
Harman
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This letter is for entertainment purposes only. Nothing in this email is intended to serve as financial advice. Please do your own research.