As highlighted in Part 1 of this two part blog, the friction costs of buying and selling real estate in Metro Vancouver are high. Defining friction costs is simple: any cost associated with transacting real estate. In part one, we took a deep dive into the costs of selling, which can be read here.
In this post, let’s jump into the shoes of a buyer and find out how much money you should set aside before considering buying that new home you’ve been eyeing. Once again, we’ll use that same sample $800,000 price tag, which would afford a spectacular one bedroom or a starter two bedroom condo in Metro Vancouver (timestamp: August 2022).
Buyer Costs
Buying a home in Metro Vancouver is certainly an accomplishment. And like most good things in life, preparation is necessary for success. By planning ahead, you can ensure that there are no surprises and that you have all funds set aside for the bills incurred by purchasing a property. Continue reading to find out just exactly what you should plan for, and how much you should ready to spend.
TAX
The tax associated with buying a property depends on a few things: what you are buying, your residency status, and the number of properties you have owned. The two types of tax that may apply to a property purchase are Government Sales Tax (GST) and Property Transfer Tax (PTT).
GST
GST is calculated at 5% of the property purchase price and is applicable on any brand new home (pre-sales, newly built homes) and any substantially re-built home (that is being re-occupied after a very significant renovation). For a complete definition of what a substantial renovation is, you can refer to the government definition covered here. One noteworthy item regarding GST is that it may be possible to roll it into your mortgage. This means you would only pay a portion of the GST bill alongside your down payment, and the rest of it would be payable in a similar manner as part of your mortgage. To verify if you have the option of doing so, it is best to consult with your mortgage advisor when purchasing the home. Using our $800,000 condo example, the GST on this property purchase price would be $40,000.
GST Rebates: Some purchasers will qualify for partial GST rebates. The most notable is the first time home buyer rebate that entitles a first time property purchaser to a GST rebate of up to 36% of the GST if the home they are buying is under $350,000. Please consult with your accountant or tax advisor for further information regarding potential GST rebates.
Property Transfer Tax
PTT was originally implemented in British Columbia as a wealth tax calculated at 1% on the first $200,000 and 2% on the balance. At the time, 95% of homes purchased were under $200,000 and were not subjected to the 2% threshold. At present, you would be hard pressed to ever come across a property under $200,000 and as a result, this tax has become one of the most burdensome on those buying property in BC. The full extent of property transfer tax is actually calculated as follows:
1% of the fair market value up to and including $200,000
2% of the fair market value greater than $200,000 and up to and including $2,000,000
3% of the fair market value greater than $2,000,000
On that $800,000 condo we are using, this would mean a bill of $14,000. This amount is payable on the Completion Date — the date the property ownership transacts into your name.
PTT Rebates: Once again, some buyers are either fully or partially exempt from paying PTT. BC does honour a first time home buyer’s program that stipulates if a purchaser has never owned property anywhere in the world, they are fully exempt from PTT on a purchase under $500,000 and partially exempt on a purchase under $525,000. Furthermore, if you are a Canadian citizen or permanent resident and are buying a brand new home, you will be exempt from the PTT in full on a purchase under $750,000 or partially exempt on a purchase under $800,000. For all PTT rebates, the purchaser must live in the property for a minimum of one full year. There are other exemptions which can be found here.
Legal fees
Legal fees are covered in Part One, but as a quick reminder, a lawyer or notary is necessary for the conveyancing aspects of your property purchase. More simply put, they serve as the liaison between you, the municipality you are buying within, the strata corporation if buying a condo or a townhouse, the lending institution, and the seller. They handle all of the paperwork to register you as the owner of the property. Typically, legal fees are between $1,800 - $2,000 for a real estate transaction, assuming you do not need any specialty advice.
home inspection
The best way to safeguard yourself in the property purchase process is by utilizing the services of a professional home inspector. Not only do these experts ensure appliances are working, they also look beyond the walls and ceilings to seek out any moisture damage, improper electrical connections, and faulty workmanship that may lead to problems during your ownership. Depending on the size of the home, a standard inspection will cost between $400 - $700. Generally a thorough home inspection for a condo costs between $400 - $500.
Appraisal fee
Anytime you are obtaining a mortgage for a property, the lender (bank or financial institution) will need to conduct an appraisal. An appraisal is a report that is generated by a third party company that verifies the existence and value of the property you buying. The appraiser assists the lender in determining the risk associated with the lender offering out a loan on the specific home. An appraisal fee is used to cover the cost of the lender purchasing an appraisal report from a third party company. Most appraisals cost between $300 - $400.
Cleaning fees
While most sellers will leave a property in clean and move-in condition, it may be worthwhile to set aside approximately $300 just in case you want a deep cleaning by your own chosen professional before you move in.
Strata move-in fee
If you are buying into a condo or a townhouse, you can expect that the strata will have a move-in fee. As part of this cost, the strata will ensure you have exclusive use of an elevator as well as supply protective padding in some areas to prevent damage. Most strata charge between $150 - $300 for a move-in or move-out. There is typically a refundable $500 deposit as well just in case something gets damaged during your move.
Moving costs
Hiring a mover is completely optional. Depending on the flexibility of your time and just how many friends you can bribe to help out, hiring a moving company may just be one of the best decisions you can make throughout the home buying process. Movers currently cost between $150 - $200/hour, so depending on the size of your home, you can expect to pay anywhere from $400 - $1,200 for a full move.
So how much should you set aside?
To calculate just how much you should put aside, we will be going ahead with our existing (not brand new) $800,000 condo example. With this, we will look at a purchase with a 20% down payment, or $160,000. If you include all items: property transfer tax, legal fees, a home inspection, an appraisal, two hours of moving costs, a deep clean, and the strata move-in fee, the total amount of friction costs adds up to $17,500.
This is a hefty amount considering you’re already in it for $160,000 for your down payment. In addition to this, I always recommend to my clients to have a an extra amount set aside for unexpected expenses. These can pop up in the form of post-purchase updates/upgrades, additional furniture costs, and if something you budgeted for ends up being a little higher in cost than you originally thought.
Once all is said and done with the friction costs of buying real estate, there is a light at the end of the tunnel. Home ownership is an incredibly rewarding achievement. Your new home should serve you well both as an asset and more importantly, a place where you will make memories to last a lifetime.
If you have any questions on real estate expenses or the housing market in 2022, feel free to reach out to me anytime at adil@adilkhimani.com
Thank you for reading,
Adil