Buying a home today isn’t cheap. Soaring house prices coupled with tighter mortgage rules, has helped make housing a lot less affordable.
If you’ve ever purchased a home before, you should be well aware of closing costs. But buyers aren’t the only ones stuck footing the bill. Sellers have their own closing costs to contend with. With a seller’s market present in many housing markets like Toronto and Vancouver, homeowners not surprisingly looking to cash in on their most valuable asset.
Closing costs are anything, but a drop in the bucket – closing costs can add up to between 1.5 per cent and 5 per cent of the selling price of your home. Let’s take a look at some of the common closing costs sellers face.
Approximate Cost: $500
Why would a seller pay for a home inspection? As the saying goes, sometimes you have to spend money to make money. If you’re in a seller’s market where buyers are lining up in droves to view your property, paying for a home inspection up front can be money well spent.
In multiple offer situations, conditions can make or break your offer. Buyers are faced with a tough choice: should I pay for a home inspection upfront with no guarantee I’ll get the property, or should I make a clean offer with the chance I’m bidding on a lemon? By paying for an inspection for buyers, you can actually encourage more offers and receive a higher selling price, which means more money in your pocket.
Real Estate Lawyer
Approximate Cost: $1,500
Selling a home is most likely the single biggest financial transaction of your lifetime, so it’s only natural you’ll need the expertise of a real estate lawyer. A lawyer does a lot more than cross the t’s and dot the i’s – your lawyer will ensure your title is free from defects and leans, transfer to deed to the buyer, and prepare the statement of adjustments.
Similar to contractors, you should get at least three estimate in writing from lawyers before making your final decision. Real estate is complicated – rather than going to a general lawyer, it’s a good idea to go to a real estate lawyer, who knows all the in’s and out’s of buying and selling a home.
Real Estate Commission
Approximate Cost: Typically based on a percentage of selling price
If you’re buying a home, we have good news: you don’t have to pay commission (at least not directly). If you’re the seller, it’s a different story. While land transfer taxes are quite often the most costly closing cost for buyers, real estate commission typically tops the list for sellers.
The standard real estate commission is 5 per cent, split between the buyer’s and seller’s agents. There may be some wiggle room when it comes to commission – in Canada’s most expensive housing market, Vancouver, it has become more common to see a flat fee. If you don’t mind doing a little extra work, FSBO (for sale by owner) companies like Property Guys can help you sell your home yourself and save significant money along the way.
Approximate Cost: None if you’ve paid off your mortgage; the greater of three months interest or the IRD if you have a fixed rate mortgage.
Mortgage Penalties can’t be that bad, can they? Wrong! Mortgage penalties can be very costly and add up to thousands of dollars, especially if mortgage rates have dropped substantially since you purchased your home. One of the most important features in a mortgage is portability – if you have a mortgage that’s portable and you’re purchasing a more costly home, quite often you can “blend and extend” your mortgage.
If you’re not so lucky and your mortgage isn’t portable, you could face a stiff mortgage penalty. Those with a variable rate mortgage will simply have to pay three months’ interest. Those with fixed rate mortgages can be in for a big surprise – you can end up on the hook for mortgage penalties in the thousands with the IRD (interest rate differential). Before you decide to sell your home, it’s a good idea to speak with your lender to find out how much your mortgage penalty might be.
These are just some of the most common closing costs sellers face. As you can see, sellers have a host of closing costs to contend with. Have you ever sold a home? Did you budget for closing costs? What was your most costly closing cost?
About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.