The Buying Process
The Real Estate Council of British Columbia protects the public interest by assuring the competency of real estate licensees and ensuring their compliance with the Real Estate Services Act. The Council is accountable to and advises government on industry issues and encourages public confidence by impartially setting and enforcing standards of conduct, education, competency, and licensing for real estate licensees in the province.
Types of Housing Ownership
A freehold interest (also known as a fee simple) is the more precise term for what we ordinarily refer to as “ownership” of a property. The owner of the freehold interest has full use and control of the land and the buildings on it, subject to any rights of the Crown, local land-use bylaws, and any other restrictions in place at the time of purchase. Strata Property – The strata property form of ownership is designed to provide exclusive use and ownership of a specific housing unit (the strata lot) which is contained in a larger property (the strata project), plus shared use and ownership of the common areas such as halls, grounds, garages, elevators, etc. This type of ownership is used forduplexes, apartment blocks, townhouse complexes, warehouses, and many other types of buildings. Because ownership of the common space is shared, the owners also share financial responsibility for its maintenance.
In some cases, you might purchase the right to use a residential property for a long, but limited, period of time. The owner of this right of use has a type of ownership called a leasehold interest. This type of ownership is usedmost often for townhouses or apartments built on city-owned land. It is also used occasionally for single detached houses on farm land, on First Nation reserves, and for apartments where the owner of the freehold interest of an entire apartment block sells leasehold interests in individual apartment units to other “owners.” Leasehold interests are frequently set for periods of 99 years, but regardless of the length of the original term, you will only be able to purchase the remaining portion. Of course, the shorter the remaining portion, the less you, or the person who eventually purchases from you, will be willing to pay for the leasehold interest.
In the cooperative form of ownership, each owner owns a share in a company or cooperative venture which, in turn, owns a property containing a number of housing units. Each shareholder is assigned one particular unit in which to reside.
The Closing Costs
It’s easy to count your available cash, but remember that all of these cash savings cannot be used as your down-payment. There are last-minute costs such as taxes, legal fees, appraisal fees, moving expenses, and house insurance to pay before you are finally in your new home.The time to budget for those “end” expenses is now. You must be prepared to pay most, and perhaps all, of the following closing costs.
Property Transfer Tax
The British Columbia Provincial Government imposes a property transfer tax which must be paid before any property can be legally transferred to a new owner. The tax is 1% on the first $200,000 of the property value and 2% on any value over $200,000. Some buyers may be exempt from this tax, so contact the Property Transfer Tax office in Victoria to be sure. (250-387-0604 or www.rev.gov.bc.ca/rpt/ptt/ptt.htm)
Goods & Services Tax
If you purchase a newly constructed home, you may be subject to 7% GST on the purchase price. However, if the home is under $350,000, a rebate will reduce the GST paid to 4.48% of the purchase price. If the price is over $350,000, the net GST to be paid increases gradually until it is a full 7% at amounts over $450,000.
If the current owners have already paid the full year’s property taxes to the municipality, you will have to reimburse them for your share of the year’s taxes.
When the lending institution requires an appraisal of the property before approving your loan, it may be your responsibility to pay the appraiser’s fee.
The lending institution may also require that a survey certificate be presented to them. The purpose of the survey is to formally establish the boundaries of the property and to ensure that all buildings are within those boundaries. Note: Lending institutions may ask for either a building location survey, which establishes where a building is located on a property, or a monumental survey, which establishes the actual boundaries of a property. If the current owner cannot provide a recent survey certificate, it will be your responsibility to pay the surveyor’s fee.
Mortgage Application Fee
Lending institutions may charge a mortgage application fee. This application fee may vary between lending institutions.
Mortgage Default Insurance
This type of insurance is required on all mortgage loans in excess of 75% of the appraised property value. Its purpose is to insure that the lender will not lose any money if you cannot make your mortgage payments and the value of your property is not sufficient to repay your mortgage debt. The insurance premium is paid to the lender and ranges from .5% to 3.75% of the loan value; however, in most cases this premium is added to the loan amount and paid for over the term of the loan.
Life & Disability Mortgage Insurance
At your option, you may purchase insurance which will ensure that your outstanding mortgage balance is paid if you die or become disabled.
Fire & Liability Insurance
The mortgage lender will insist that you purchase an insurance policy which guarantees that, in the event of fire, the lender will receive the balance owing on the mortgage loan before you receive any insurance proceeds.
The transfer of property ownership from the seller to the buyer must be recorded in the Land Title Office in order to protect the new owner’s interests. You will probably want to engage a lawyer or notary public to act on your behalf during the completion of your purchase. The lawyer or notary public will charge a fee for this service, plus disbursements, including the Land Title Registration fee. If you are financing your purchase with a new mortgage loan, there will be a further fee and disbursements to prepare and register the mortgage documents.
Other last-minute costs:
- Home inspection fees
- Moving expenses
- Deposits required by utility companies
- Household goods:
- Kitchen appliances
- Garden equipment
- Garbage cans, tools, window coverings, etc.
- Redecorating or renovations
Agent Licensing Requirements
It is important to understand that in British Columbia, the person you hire to assist you to purchase your home must be licensed under the provincial Real Estate Services Act. Responsibilities of seller’s and buyer’s licensees In every real estate transaction there is a seller and a buyer. A real estate licensee may be employed as an agent for the seller, as an agent for the buyer, or both. Early in the first meeting with a real estate licensee, the licensee should provide you with full disclosure about the nature of his or her
relationship with you, as a buyer, and any relationship he or she may have with the seller. The licensee is required by law to provide this information and explain its implications to you.
Your relationship with a real estate licensee
Real estate licensees work within a legal relationship called agency*. The agency relationship exists between you, the principal, and the brokerage, the company under which the individual licensee who is representing you, is licensed. The essence of the agency relationship is that the brokerage has the authority to represent the principal in dealings with others.
One brokerage acts for the buyer and one brokerage acts for the seller When a seller employs a real estate licensee to help sell his or her property, the licensee becomes the agent of the seller. As a buyer, it is possible for you to select a licensee to act as your agent. It is in your interest to obtain the licensee’s consent to represent you. As a buyer, you become the principal and the licensee becomes your agent. Brokerages and their licensees are legally obligated to protect and promote the interests of their principals as they would their own. Specifically, the brokerage has the following duties:
- Undivided loyalty. The brokerage must protect the principal’s negotiating position at all times, and disclose all known facts which may affect or influence the principal’s decision.
- To obey all lawful instructions of the principal.
- An obligation to keep the confidences of the principal.
- The exercise of reasonable care and skill in performing all assigned duties.
- To account for all money and property placed in a brokerage’s hands while acting for the principal.
You can expect competent service from your brokerage, knowing that the company is bound by ethics and the law to be honest and thorough in representing a property listed for sale. Both the buyer and the seller may be represented by their own brokerages in a single transaction.
Dual agency occurs when a brokerage is representing both the buyer and the seller in the same transaction. Since the brokerage has promised a duty of confidentiality, loyalty and full disclosure to both parties simultaneously, it is necessary to limit these duties in this situation, if both parties consent.
If you find yourself involved in a transaction where the same brokerage is working with both the seller and the buyer, before making or receiving an offer, both you and the other party will be asked to consent, in writing, to this new limited agency relationship.
This relationship involves the following limitations:
- The brokerage will deal with the buyer and the seller impartially.
- The brokerage will have a duty of disclosure to both the buyer and the seller except that:
- The brokerage will not disclose that the buyer is willing to pay a price or agree to terms other than those contained in the offer, or that the seller is willing to accept a price or terms other than those contained in the listing.
- The brokerage will not disclose the motivation of the buyer to buy or the seller to sell unless authorized by the buyer or the seller.
- The brokerage will not disclose the personal information about either the buyer or the seller unless authorized in writing.
- The brokerage will disclose to the buyer defects about the
physical condition of the property known to the brokerage.No agency
relationship You may also choose to use the services of a licensee
without having any kind of agency relationship. This might occur, for
example, when you are being shown a property by the seller’s licensee.
The licensee you choose to work with in this manner has a legal and
ethical duty to provide you with accurate, honest answers to your
questions and can provide all these services:
- Explain real estate terms and practices
- Provide and explain forms used
- Assist you in screening and viewing properties
- Inform you of lenders and their policies
- Identify and estimate costs involved in a transaction
- Assist you in establishing your range of affordability
- Prepare offers or counter-offers at your direction
- Present all offers promptly
A licensee who is not your agent cannot:
- Recommend or suggest a price
- Negotiate on your behalf
- Inform you of his or her principal’s bottom line
- Disclose any confidential information about his or her principal unless otherwise authorized.
You should not provide a licensee who is not your agent with any information that you would not provide directly to his or her principal. Remember, it is possible to enjoy the benefits of a licensee’s knowledge and experience, regardless of whom that licensee is representing.
Services a buyer can expect from a real estate licensee
You can expect licensees to provide you with such services as:
- Helping you to clarify the type of property you need and can afford
- Providing information about available properties and sources of financing
- Arranging appointments to view available properties
- Providing accurate answers to any questions you may have about a specific property you are considering
- Explaining the forms used in a real estate transaction and assisting you in making a written offer to purchase
- Presenting your written offer to the seller
- Familiarizing you with the steps you must take to complete the purchase after the seller accepts your offer.
Keep in mind that if the licensee with whom you are working is the seller’s agent, any information you give to him or her must be passed on to the seller. It is in your best interest to discuss with that licensee only what you would discuss with the seller in person.
*Agency descriptions have been adapted from the Working With a Realtor brochure and used with kind permission from the British Columbia Real Estate Association.
Once you have found the property you would like, a written offer to purchase must be prepared. Considering the substantial nature of this investment, you should work with a lawyer, notary public, or a real estate licensee when preparing an offer to purchase. An offer is usually recorded on a standard form entitled Contract of Purchase and Sale.
What should the offer contain?
When you prepare an offer, it should contain a number of standard details, plus any conditions which are important to you. Be fully aware that once you sign this document and the seller also signs it, a legally binding contract has been formed. Legally binding means both you and the seller will be bound by the terms of the contract and must each perform your respective obligations as stated within that contract. Either of you can go to court to compel the other to perform his or her part of the contract. Even if a contract contains subject clauses, it is legally binding as soon as both the buyer and the seller have signed the contract.
Your offer should include:
- Date of offer
- Date and time your offer expires
- Full legal names and addresses of both thebuyer and the seller
- Full legal description of the property
- Amount of the deposit you are giving (which will be held in a trust account and will form part of your down-payment)
- Sale price
- Amount of your cash down-payment and details as to how you will finance the remainder of the purchase price
- Your desired closing and possession dates
- A list of the conditions which must be satisfied before the sale can occur. These are called “subject clauses” or “conditions precedent”
- A list of items which are not attached to the building (chattels), but which you state are to be included in the sale price; for example, drapes, refrigerator, stove, etc. It is helpful to be specific in the description of these items
- Your signature
What are the seller’s options?
When the seller receives your “offer to purchase,” he or she has three options.
Accept the offer exactly as written
If the seller signs your offer without making any changes, a legally binding contract has been formed. Again, legally binding means both you and the seller will be bound by theterms of the contract and must perform your respective obligations as stated. Your performance can be enforced in a court of law.
Reject the offer - Make a counter-offer
If the seller changes anything at all on your original offer, the seller is considered to have rejected your offer and to be making a new offer back to you. This new offer is usually referred to as a “counter-offer”. When you receive a counter-offer, you then have the same three options as the seller had: accept, reject or make a further counter-offer. The process of counter-offers may continue until an agreement is reached. If the counter-offer is unacceptable to you or if you have changed your mind about the purchase, the seller does not have the option of returning to your original offer and accepting it.
What are the buyer’s options?
If, after making a written offer, you decide you don’t want to purchase the property, it may be possible to revoke the offer. Many legal problems can result from the revocation of an offer, so you should seek professional advice about the correct procedure to follow.
More about “Subject” Clauses
The purpose of a subject clause (also know as a condition precedent) contained in an offer to purchase is to set out a specific condition which must be fulfilled before the sale can go through, although the contract is legally binding once it issigned by both parties. Subject clauses must be carefully and precisely worded. You would be wise to get professional help in composing them; however, it is ultimately your responsibility to be sure the clauses mean what you want them to mean. There can be as many subject clauses as you are able to negotiate with the seller; however, the fewer you put into an offer, the more serious you seem as a buyer and the better the chance is that your offer will be accepted. Remember that you are, in effect, asking the seller to take the property off the market during the period while you are attempting to fulfill the conditions you have set.
Some possible items you might wish your purchase to be “subject” to include:
- A satisfactory professional building inspection
- The arrangement of the financing you require
- The lender’s approval of your application to assume the seller’s existing mortgage
- The sale of your present home
When you place “subject” clauses on your offer to purchase, you are required to use every reasonable effort to see that the conditions are satisfied. It is important to know that subject clauses are not “escape” clauses that allow you to avoid your legal responsibilities in the contract. Once you have fulfilled the conditions, written notification should be given to the seller that you are removing the subject clauses.
If you are unable to meet the conditions after making every reasonable effort to do so, the contract ends and there is no legal obligation to complete the purchase. It is important to remember that if the brokerage is holding your deposit, both you and the seller must sign a deposit release form prior to the deposit being released to you.
A seller may wish to accept your offer containing subject clauses, yet still be free to consider other offers until you have removed the conditions. To allow his or herself this freedom, the seller may ask for a clause in the agreement which permits the seller to require you to remove all subject conditions within a short, specified time period (usually between 24 and 72 hours) if the seller receives another attractive offer. If you cannot do so, your conditional contract comes to an end. Sellers are most likely to request this time clause where you have made an offer which is subject to the sale of your current home.
The Contract of Purchase and Sale, which you signed, will state the completion day for the transaction. On that day, legal ownership will transfer from the old owner to you in exchange for the purchase price of the property. You will be able to move in on the possession date stated on your contract. The completion and possession dates are not necessarily on the same date.
Do you need legal assistance to complete the purchase?
It is normal practice for the buyer to engage a lawyer or notary public to prepare the documents necessary to transfer the legal ownership. Among other things, he or she will protect your interests by:
- Searching the title in the Land Title Office registration system to find if anyone other than the seller has any legal rights to the property and to see if there are any registered easements or restrictive covenants
- Preparing the documents to transfer ownership from the seller to you, including the property transfer tax return
- Ensuring that the seller’s old mortgage has been properly discharged, if this is required
- Confirming that all payments for which the seller is responsible have been made
- Arranging for you to sign the transfer documents
- Preparing a Statement of Adjustments outlining all monies owed by you and the funds you will need to complete the transaction
- Delivering the final amount due to the seller and ensuring you are registered as the owner in the Land Title Office