Interview Reg Sukhu With No Obligation
Robin Sukhu is a real estate agent at Re/Max 2000 Realty Inc., Brokerage. He has 23 years’ experience in the Toronto Market.
From time to time, we hear of a buyer scrambling during the last week of closing to find a few thousand dollars to close a real estate purchase. This is the buyer who has no idea of the additional charges included in the actual amount a lawyer requires to fund the closing of a purchase transaction. In the meantime, this buyer may have used remaining savings for expensive furniture and appliances that cannot be returned, to complete the decoration of a dream home.
To be prepared for closing costs as a buyer, you need to fully understand 3 things:
This is the information that you must insist on getting at the earliest opportunity from each of your real estate agent, your mortgage broker, your mortgagee, and your lawyer.
Remember, as well, that other costs and emergencies may arise following the closing. It would be wise to leave a cushion in your savings for those contingencies.
How much money you must give to the Seller on closing
The amount you must give to the Seller is called the “balance due on closing”. It is calculated by the Seller’s lawyer and given to your lawyer on what is called a “Statement of Adjustments”.
In the Statement, adjustments are made to the purchase price. These may be credits to you in the case of unpaid bills you will inherit from the Seller, rebates promised to you, or unearned rent already paid by a continuing tenant to the Seller. More often, they are additional charges to reimburse the Seller for bills paid in advance that are fairly your responsibility; e.g., realty taxes or common expenses paid for a period following your occupancy date, or sales taxes on new home construction.
In the agreement of purchase and sale, there will be reference made to “usual adjustments”. In the case of a new home purchase, each adjustment will likely be named.
Before you sign the agreement of purchase and sale, ask your agent to tell you what they are likely to cost you. In the case of a new home purchase, insist on getting a list setting out each actual charge.
How much money you will net out of the mortgage proceeds
When you are given a mortgage commitment, you will also be given a disclosure statement that details the principal amount of the mortgage, the deductions to be paid from the proceeds and the additional charges you must pay to get the mortgage. There will be a balance shown as the amount left for you. You must make sure of 3 things:
1. There should be something written on each detail line of the statement. If there is no charge, you should see that. If there is a charge but it is not fully calculated, ask your broker and mortgagee how much it is and when you have to pay it.
2. The amount stated as the net advance to you, the borrower, should be exactly what you expect to receive on closing. If it is subject to amounts to be determined or calculations to be made or adjustments of any kind, ask your broker and mortgagee what they are and how much the actual net advance might be. This is usually the biggest surprise for an uninformed buyer on closing day.
3. Ask your broker and mortgagee whether there are any additional fees other than those mentioned on the statement. If you have signed any Direction, application or other document agreeing to pay a fee, mention it specifically and get a clear understanding of your obligations.
How much money your lawyer requires from you to close the deal
The amount of money your lawyer will ask you to bring for the closing is calculated as follows:
The balance due on closing
Less - the actual net advance (the amount your lawyer receives from the mortgagee)
Plus + legal fees, disbursements, and amounts the lawyer is obligated to pay on your behalf.
The balance due on closing
There can be numerous adjustments to the balance due on closing such as realty taxes, fuel oil, assumed contracts, e.g. alarm system, flat rate utility charges and rebates. For a new home, there are warranty charges, meter installation costs, local improvement charges, tree planting, driveway paving, fence building, legal costs on mortgages assumed, reserve funds for Condos, extras and whatever else is mentioned in the agreement of purchase and sale.
The actual net proceeds of the mortgage
Deductions from the mortgage proceeds are either made by the mortgagee or directed by you to be paid to your mortgage broker or lender. These can be property tax holdbacks, prepaid interest charges to the date of adjustment of the mortgage, administrative and application fees, broker’s fees, lenders’ fees, appraisal or inspection fees as well as applicable sales taxes on mortgage insurance premiums. In rare cases, the actual mortgage insurance premium can be deducted instead of being added to the principal amount of the mortgage.
Your lawyers legal fees, disbursements and amounts he/she is obligated to pay on your behalf
In addition to their fees for services and incidental costs, including applicable taxes, lawyers typically charge a home buyer for searches conducted to determine the validity of the title and to ensure that utility and contract accounts which the buyer assumes are up-to-date. Incidental costs may be for photocopies, couriers, long distance calls and the like.
They are also reimbursed on closing for payment obligations made or to be made by them on your behalf. These typically include provincial and municipal land transfer taxes, survey or title insurance costs, title registration costs and occasionally, fire insurance premiums for neglectful buyers. These costs are considerable and should be known by you well before closing.
Most buyers will ask a lawyer the amount of his/her fees, but neglect to meet with that lawyer early on to review the agreement of purchase and sale, mortgage commitment and disclosure statement and discuss his/her disbursements. They wait to do this when they go to the office to sign documents and bring in the required funds. That is way too late. You should insist, at the very least, that your lawyer review the documents and send you an opinion letter early on to inform you of any cause for concern. The lawyer should set out in detail the estimated amount required to close the transaction, including taxes on any charges, so that you are not left scrambling on closing day.
© 2009 Reg and Robin Sukhu