As we approach the busy spring real estate market I thought it would be a good opportunity to share my thoughts on the most common mistakes I see home buyers making year after year.
1. Hiring the first agent they meet
I see many mistakes that are not the home buyers fault but are the result of bad advice from inexperienced agents.
Think the agent you found has an in depth knowledge of real estate and can help you make a smart decision? Think again. It takes just 4.5 weeks of online coursework to become a real estate agent in Ontario. Most agents know very little about real estate, neighbourhoods and home construction.
Make sure to interview several agents before selecting one and ask them tough questions to test their knowledge.
2. Not Having an Easy Exit Guarantee in their Buyer Representation Agreement
Most buyers today will at some point in their home search sign a document called a Buyer Representation Agreement. A Buyer Representation Agreement gives your agent both the authority and responsibility to represent your interests during your home search and is a commitment that you will work with them exclusively for a certain period of time.
Unfortunately, Buyer Representation Agreements cannot be cancelled which means that if you’ve committed to working with your agent for six months and find that you’re unhappy with their service a few weeks into your home search, you can’t fire them. You’re stuck working with them or risk paying them their commission personally if you buy a house with another agent.
To avoid this, buyers should always include a clause in their Buyer Representation Agreement that allows them to terminate the agreement at any time, no strings attached.
3. Not Reading their Buyer Representation Agreement
While you should review the entire agreement before signing it, you want to pay particular attention to Clause #2 labeled Commission.
In Ontario, sellers generally pay both their agent as well as the buyer’s agent in a transaction. The commission paid to buying agents is typically 2.5% of a home’s sale price but it’s not uncommon to see buyer agent commissions in the 2%-2.25% range and in some cases as low as $1.
Going back to your Buyer Representation Agreement, in Clause #2 your agent is going to enter the commission they feel they’re entitled to and more often than not it’s going to be 2.5% of the sale price of the home you buy. Unfortunately this clause also states that if your agent gets paid any amount less than 2.5% of a home’s sale price then you have to pay your agent the difference.
For example, suppose you end up buying one of the many “for sale by owner” houses on the MLS at a price of $600,000 and the seller only offers to pay your agent a commission of $1. Your agent can legally require you to pay them their commission of $14,999 (2.5% of $600,000 less the $1 paid by the seller).
At Realosophy we draft our Buyer Representation Agreements to say that we will get paid whatever the seller or listing brokerage is offering (as advertised on the MLS Listing), this way our clients never have to worry about paying the difference. I suggest you do the same.
4. Not exploring neighbourhoods
More than 50% of the buyers we work with end up buying a home in a neighbourhood they weren’t even considering when we first met them.
At Realosophy we use our Neighbourhood Match tool - an eHarmony for neighbourhoods – to help introduce our clients to neighbourhoods they either haven't heard of or hadn't considered before. With roughly 500 neighbourhoods in the GTA ,Neighbourhood Match is the only way we can effectively drill down to several specific neighbourhoods that meet our clients needs.
As an example, just last week I met with buyers who were very focused on the east end of Toronto. Their budget was between $600-$750K, they were open to detached, semis and towns, they need at least 3 bedrooms, they want a neighbourhood that is walkable and has good access to transit and has good schools. We ran them a Neighoburhood Match report for the west end of Toronto (see sample report) and ended up introducing them to many neighbourhoods they hadn’t considered before.
Don’t stick with just the neighbourhoods you know. Make it a priority to explore new ones.
5. Buying for today, not for tomorrow
Any decision to buy a home should not only meet your needs today but should meet most of your potential needs 3-4 years from now as well. Do you see yourself needing more space in a few years for a home office or a child? Are good schools going to be a priority? You need to be thinking about these questions today.
A good rule of thumb is that you want to be able to stay in your home for at least 5 years to ensure your home has appreciated enough to cover all your transaction fees should you need to sell (land transfer taxes, CMHC premiums and agency fees).
I meet too many buyers who plan to buy a condo for a year or two and then sell it to buy a home. This is a terrible strategy because their condo will probably not appreciate enough for them to recover their transaction costs which means they’ll likely end up losing money.
6. Spending whatever the bank will give them
Many of our buyer clients start their home search planning to spend whatever their mortgage broker approved them for and only when we sit down and go through the actually monthly expenses of owning a home do they rethink their strategy.
Most banks generally do not want more than one third of a buyer’s gross (before tax) income to go towards their mortgage payment and property taxes. This means that a couple earning a combined salary of $10K before tax per month would qualify for a $600K mortgage with their monthly mortgage and property tax payments totaling around $3,200 per month. This does not include other housing expenses like utilities, insurance or maintenance.
For some buyers, a monthly payment of one third of their gross income for their mortgage and property taxes is manageable. But for many buyers, in particular those with above average monthly expenses for other financial commitments (child care, retirement savings, travel, medical etc) this level of monthly payments for a home is unmanageable and would likely leave them house poor.
Make sure you’re buying at a price point that works for you, not for your bank.
7. Falling for the staging
Some well staged homes are beautiful and well maintained homes to begin with; the staging is just a small part of what gives the home its wow factor.
In other cases, staging elevates homes that are well below average in terms of quality into the “it” home of the week. These are the homes you want to keep an eye out for because overpaying for these houses means you’re overpaying for fluff, not substance.
When you see a house you love, go back and take a look at the house for a second time once the initial buzz has worn off. If the home actually is a below average home, you’ll start to see things that weren't obvious the first time - the wood floors are in bad shape and need to be replaced, the newly painted kitchen cabinets look cool but they’re actually falling apart and will need to be replaced, most of the houses has wood paneling (not drywall) that has just been painted over to look more modern.
You’ll also want to keep an open and creative mind when looking at homes that are not staged. These homes will often offer you more value because a lot of buyers can’t look past the old carpet and pea green wallpaper.
8. Always relying on the seller’s home inspection
Most houses in Toronto are getting multiple offers and more often than not the sellers and/or their agent have ordered their own home inspection before listing the home for sale. Sellers make the home inspection report available to all buyers in order to encourage them to make an offer without their own home inspection condition.
While most inspectors are honest and transparent, I have seen a number of home inspection reports that are either vague, misleading or are missing material deficiencies.
A couple of months ago I remember visiting three houses in one day that had material deficiencies that did not find their way into the home inspection, or where glossed over. In one case the home previously had a fire which burned the home’s main structural wood beam in the basement reducing it in size by 1/3, in another the home had obvious termite damage and in the last house the foundation (only visible behind the furnace) was bowing significantly.
Remember that the seller’s inspector is not accountable to you as a purchaser if they miss anything. Be cautious before deciding to rely on their inspection.
9. Not doing any due diligence before making an offer
When you find the home you love the next step is not to jump in and make an offer, despite the fact that most agents might tell you this is the next step.
Your agent should be doing some due diligence into the property you’re about to spend hundreds of thousands of dollars on.
What do we mean by due diligence? Due diligence means both finding and sharing with you every bit of information (good and bad) that might influence your decision to buy the home. As an example, ask yourself if you would want to know the following about the dream home you’re about to buy:
- The parking advertised in the MLS listing is not legal
- The lot frontage is advertised as being 25’ wide but it’s really only 18’ wide
- There’s evidence that the home might have an abandoned underground oil tank in the front yard.
- The new family room addition you really love was added illegally.
- The last two owners sold after owning the house for less than a year and a half. You would be the third owner in three years.
- The house had major structural repairs done after a car drove into it.
These are all real life examples of red flags we found before our clients made an offer on the home they wanted to buy. Some are deal breaker issues while others might require further research before a decision can be made. But in every case, all of these are material facts that most buyers would want to know before making an offer.
This part of the home buying process is actually so complex that we've been developing our own tool to help or agents and clients do this more efficiently. It aggregates data from many different sources and then looks for trends and circumstances that it knows might be problematic and highlights them when our agents and clients are viewing the property online. I’ll write more about this when we get close to launching it publicly.
10. Not knowing what the house is worth before making an offer
When most buyers find the house they want to buy, their agent’s next question is typically: how much do you want to offer?
Most agents and buyers forget to ask a more important question, how much is the home worth?
Many buyers and agents believe that a home’s asking price is a reflection of what the house is worth. Nothing could be further from the truth. The seller’s asking price can, and often is, very different from the home’s true market value. Sometimes we see agents price homes for much more than they’re worth, for example listing a home for $700K even though it’s worth around $600K. Alternatively, agents can price homes for far less than they’re worth and they often do this to try to generate a bidding war. In this kind of scenario, an agent might list a home for $499K even though it’s really worth $600K.
Before asking your agent how much you should offer, you need to ask them what they think the house is worth and you should ideally get them to put that in writing.
If you’re competing in a bidding war in Toronto you will likely have to pay a bit of a premium above market value in order to win it. But you need to know what the home is worth in order to make an informed decision regarding how much of a premium is reasonable and how much is too much.
John Pasalis is the President and Broker of Realosophy Realty Inc. Brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way. Email John
February 24, 2015Buying |