Closing Costs

One of my readers suggested I tackle this topic, so I’m much obliged to help out.

For some people, this might be a list of costs they were never even aware of.

For others, this leads into a detailed discussion of how to include these items in a capitalized cost figure, and how it affects their return on investment…

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I remember in Grade 12 Economics when we played ‘the stock game’ and were responsible for trading in an imaginary portfolio and keeping track of our losses and gains.  This was before sites like GlobeInvestor and BigCharts were around so we had to look up quotes in the newspaper!  I found a way of cheating, of course, by always bringing Thursday’s newspaper on Friday and buying the stock at the previous day’s prices.  Certainly my teacher must have had her suspicions when I finished the term with a 947% profit margin…

But the most unrealistic part of this game (other than the cheating…) was the fact that we didn’t include a trading fee or a commission on each trade!  In theory, you could buy a share of stock for $9.10 and sell it for $9.25 while claiming a small profit.  Not so, in real life…

The closing costs associated with real property far outweighs any costs you could possibly incur with trading equities.  Whether it is a flat $19.99 trading fee or a 2.5% management fee in your mutual fund – this is nothing compared to what it costs to sell your house or condo.

Here are the closing costs associated with real estate:

Sales Commissions

Starting with the most obvious one, and of course how I make my living, sales commissions are a part of every real estate transaction unless the owner sells the property himself, which happens probably one out of several thousand in Toronto.  Fees are generally 5% across the board, but luxury properties (ie. $12,000,000 estates or cottage properties) and commercial properties usually come with a 6% fee.  Of course, there are those companies and agents who slash their commissions to as little as 3%, but I’m not going to touch this subject for fear of repeating myself.  If you’re interested, click here.

People have tried to bypass the commissions payable to Realtors, but it’s not easy.  The exposure of the MLS system and the 26,000 Realtors in the GTA far outweighs the exposure of a sign that a seller can put on his own lawn, and since most buyers work with agents, the seller would be responsible for a 2.5% commission (half of the 5%) in the event that he did find a buyer on his own.

Land Transfer Tax

Thank you, David Miller!  Just when we thought we couldn’t get taxed anymore by our Mayor-by-default (no offence to Jane Pitfield, but can we find somebody to run against this guy next time?), we hear that Toronto has decided to mimic the Ontario Land Transfer Tax.

The taxes work on a sliding scale as follows:

City of Toronto Land Transfer Tax:
0.5% – Up to and including $55,000
1.0% – $55,000 to $400,000
2.0% – Over $400,000

Province of Ontario Land Transfer Tax:
0.5% – Up to and including $55,000
1.0% – $55,000 to $250,000
1.5% – $250,000 to $400,000
2.0% – $Over $400,000

Keep in mind that it is the BUYER who pays Land Transfer Tax, not the seller.  So let’s assume you’re selling your condo and moving into a house; you will pay Land Transfer Tax on the house, but the BUYER will pay the tax on the condo you are selling to him.

So while you might consider the Land Transfer Tax that you pay on the house a “closing cost” of the overall transaction, you wouldn’t include it in a capitalized cost figure for the sale of your condo.

Don’t forget that when you first bought the property you are currently selling, you paid Land Transfer Tax.  So if you paid $5,500 in 2004 when you bought the condo you are selling now, this cost might not be a “closing cost” in 2008, but should be considered in your capitalized cost for disposition of your property.

Legal Fees

Legal fees usually consist of two parts: fees and disbursements.

Fees are what you pay your lawyer for his time, and disbursements are expenses incurred by a law firm on behalf of the client, in order for the firm to proceed with that client’s matter.

Examples of disbursements in Ontario:
-Registration Costs: It costs $70 to register a deed or mortgage in Ontario.
-Title Search Fees: A lawyer usually hires a searcher to conduct a search of the title on his behalf.
-Municipal Compliance Report: Usually $200.00
-Notice of Change: A buyer must submit for tax records and water records, costing $34 and $58 respectively.
-Title Insurance: A must for all buyers, usually $100 – $300

Notice that some of these disbursements are for buyers and some for sellers.  There are fewer disbursements when selling, but I’ve never met anybody who used one lawyer for his purchase and a different lawyer for his sale, so everything will be included in one bill from your real estate lawyer.

Let’s assume that your total legal fees for the sale of your property and purchase of a subsequent one would amount to around $1800.  If you’d like to split this into $800 for the selling portion and $1000 for the buying portion to include in the capitalized cost figure, be my guest.

Moving Company

I’ve met more and more people who are moving their possessions themselves, whether it’s through the rental of a cube-van, or just many “small trips” to the new home.  I never hired a moving company when I moved into my condo; I brought a car-load of items every day, and then had a friend with an SUV help me with some larger items.  Any new items I purchased (couch, for example) I had delievered directly.

But if you do hire a moving company, I’d put the cost at about $500 for a condo, and sky is the limit for a house depending on the size.

And that’s that.

So let’s take a typical example, shall we?

You sell your condo for $300,000, and purchase a house for $450,000.

You’ll be responsible for $15,000 in sales commissions on the condo, and $10,200 for Land Transfer Tax on the house ($5,475 for Ontario, and $4,725 for Toronto).

You should expect to pay upwards of $2000 in legal fees, and $500 for a moving company.

Your “closing costs” might be calculated differently than your “capitalized cost figure.”

You might consider the LTT on your new house to be a closing cost associated with the overall transaction, but if you’re really trying to calculate your return on investment for your condo, you’d use the LTT first paid when you purchased it.

People might want to get creative when it comes to including items in closing costs such as their new plasma-TV, or maybe depreciation on their investment when it comes to their capitalized costs.

The funny part is, I’ve would say probably 80% of my clients who purchased condos this year ended up buying a new flat-screen TV.

A new TV is almost always a part of purchasing a new condo.  Sooo…..could it be considered a “closing cost?”

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  1. Alex says:

    Very insightful! Thanks David!

    Merry Christmas!

TWEETS