The real estate game has really changed over the last two decades. In Canada, gains on your primary residence or place of living is tax exempt and in turn has become a major source of wealth creation for Millennials. When I was young and starting off in the industry, the goal of any purchase and sale was to achieve the elusive detached, two car garage home by the time you retired. With the boom in the Canadian housing market, millennials are treating property more and more like the stock market, trading one asset for another and as a result, getting to their destination much faster than ever before.
For context, in 2007, I purchased two units – a one bedroom for $320,000 in Downtown Toronto, and a one plus den in a booming neighborhood for $292,000. In 2020, just prior to the Covid crash in Real Estate, the same units were sold for $650,000 and $720,000, respectively. Unfortunately for me, I sold these properties off long ago. Oops.
What I’ve learned from buying and selling personal properties over the last 15 years is this – there are many unspoken costs to upsizing, downsizing, and trading real estate. When you are making huge sums of money through each trade, you rarely stop to assess the true cost of each change. Most Realtors won’t acknowledge this because guess what, they earn commission of each of your transactions.
As a Realtor myself, I strive to provide the most honest feedback, advice and consultation to all my clients regardless of any immediate sale or commission. In turn with this trust, I earn a client who trusts me for their lifelong real estate journey. If you are not in Toronto, I urge you to qualify, interview, and vet your agent to make sure their intentions are in the right place! This will save you thousands in the immediate and potentially millions in the long term. If you are in Toronto, or the surrounding area, then give me a call! Obviously.
So what are the costs of upsizing, downsizing and a simple move?
So you are thinking of making a move. Let’s break this down into 3 parts – the sale, the purchase and the move itself.
Let’s get the obvious out of the way first. In most cities and states around the world, the Seller pays the commission to both the buying and the selling agent. This commission is deducted from the purchase deposit and the rest is returned to the Seller – meaning the money is paid before you ever see it. Rates may vary in your particular city or state, but the premise is the same – Realtors are paid very well for a successful deal. Seller commission rates in the GTA generally follow this framework:
- Buying Agent – the agent who brings the buyer to your home. Average commission is 2.5% of sale price + HST. This commission may fluctuate if the Seller wants to offer a lower commission (which often leads to less showings and decreased market visibility) or when the seller offers a higher commission (to incent more viewings and motivate selling agents to help facilitate the sale)
- Selling Agent – the agent who represents you in selling your home. Average commission paid to the selling agent is 1.5% of sale price + HST. I will caution here, that slick agents will charge unassuming Sellers more than this. I know first hand because when I was young, my mother found an agent who could speak her native tongue and he charged her double the market rate. These agents are simply preying on misinformed first generation clients and are borderline criminal. Please do your due diligence and ensure you know what the market rate is and accept a premium rate only if you find value in it.
- Marketing – Depending on the agent you are working with, some may cover this to an extent. Marketing typically includes flyer drops, open house expenses, professional staging and photography, etc. I have seen many selling agents charge this to the Seller on top of their commission rates, so again do your due diligence. For reference, I include professional photography with every listing, and Staging with every sale as part of my value offerings.
- Taxes – While I won’t go into Canadian tax law, you can be sure if you made money on an investment in Real Estate, you will owe taxes one way or another. This will cut straight through your profits, so any investment strategy needs to factor what you will have left net of these expenses. Of course, as alluded to earlier, primary residences are shielded from taxes on capital gains here in Canada. I will just caution that the definition of a primary residence is loosely defined, so don’t try to walk that line too tight – you will get burned. Capital gains are essentially a tax on 50% of your gains at your progressive tax level.
- Mortgage Fees – This can easily be slotted into the move section, but any type of mortgage transfer, cancellation will likely induce some sort of fee. If you were wise over the last decade and kept your mortgage open, you may be in luck – however those who locked in rates may have a significant penalty to consider. Note there are a few smaller desk fees and account charges to consider, so if you’re trying to define your budget down to the penny, talk to your existing mortgage broker and figure this out in advance. This can run you anywhere from a few hundred to a few thousand dollars depending on your current mortgage status.
- Lawyer Fees – In order to process the change of ownership in Real Estate legally and safely, it helps to have a lawyer file the required documents with the city. This can run you between $1200-$2000.
- Accountant Fees – to a lesser degree, your accountant may charge you a bit more to file your Real Estate transaction. Costs may be negligible but worth mentioning nonetheless.
- Home Touch Ups – Depending on any clauses you have in your Purchase and Sale Agreement, most sales require you to leave your home in working, well kept condition. It’s also good karma to fix anything that may be a liability down the road. So if you hid a hole in the wall by mounting a TV, now’s the time to patch that up.
Finally some good news. When you buy a new home, in most cases you do not have to pay your agent. The agent helping you will be more than happy to show you around for free if it means the Seller will pay them for brokering the deal. Of course, while this helps your budgeting, there are still some costs to consider with any purchase here in Ontario, Canada.
- Taxes. The most dreaded word. Of course, with any purchase here in Ontario, you have to pay something called a Land Transfer Tax, which basically transfers the land to your name. Here is a link to a tax calculator in Ontario. Simply punch in the purchase price of your new home, press calculate, then pick up your jaw from the ground. $16,475 on a $1,000,000 home! If you live in Toronto, I have another surprise for you – that MLTT (or TLTT) is just for you. Above provincial taxes, Toronto has it’s own separate tax at the municipal level, essentially doubling your rate from $16,475 to $32,950! That’s right. Almost $33,000 just to buy a one million dollar home in Toronto.
- Lawyer. Similar to the sale, the lawyer charges based on transaction. So budget another $1,200-$2,000 for the lawyer to close your new property as well. Here they’ll help you run a title search to make sure it’s free and clear of any issues before you take ownership of the property and land it sits on.
- Mortgage. I’ll loop this into the Purchase and with the mortgage category since any new mortgage will likely require an appraisal on your dime. The bank will need to assess if your purchase is worth what you paid for, and in turn worth the loan they are going to give you to close. May not cost much and some banks rebate this, but any standalone appraisal can run you a few hundred bucks.
- Home Inspection. While new builds are generally covered by a new home warranty program (Tarion here in Ontario), chances are any preexisting unit is passed its warranty period. Hence it’s worthwhile to pay up for a great Home Inspector to give you his/her blessing. I use an amazing one here in Toronto that I recommend to all my clients who runs about $400-$500.
- Insurance. Again, it may not be a lot, but still worth mentioning. If you are moving from a great neighborhood into a booming one, chances are the rates of insurance may be very different. Same applies if you move from a condo to a freehold dwelling. These rates can vary quite significantly and it’s worth investigating to at least have a ballpark figure.
Lastly, let’s chat quickly about the Costs of Transition. Here are some more line items to factor into your budget:
- Bridging of Mortgage. If you were not successful in securing the exact closing date of your new and old homes, you will be stuck in a position where your mortgage overlaps. This means you will be paying two mortgages for a few days, weeks or months. If you happen to close your existing home prior to the new one, you will need a place to store your furniture.
- Storage Space. See point above. Temporary storage space is always available to rent, but it isn’t exactly cheap. If you don’t have a basement or garage to borrow, budget a few hundred for this .
- Proration of Utilities and Services. Much like the mortgage bridge, the same will apply to your existing utilities, property tax, maintenance, internet, cable, etc. Luckily subscription services like Netflix and Spotify don’t care where you live so you don’t have to worry about those. For your existing services, double check that you don’t have any crazy cancellation penalties and factor new account startup fees.
- Moving Fees. If you have a bunch of friends with big cars, you might be able to save on this – but considering you’ll likely need to scoop up some beer and chicken wings for the team – it won’t be much. Don’t forget the moving supplies – boxes, tape and bubble wrap can add up quickly. Typical movers in Toronto can run you at least $500+ based on the size of your home and how much stuff you. Supplies can easily run you another $100-$300.
- Making your home home. Most of my Buyers never factor this in. They budget right to the max of affordability, then go into deficit painting the house and making it their own. Things to consider upon moving in are mirrors, bathroom sets, light fixtures, potlights, TV mounts, deep cleaning, garage openers, new locks, etc. Think about your furniture too! A nice 2 seater may fit snugly into your 1 bedroom condo, but sitting in the middle of an open concept townhouse family room may make you want to rip your eyes out. If you are buying a precon, this list grows exponentially as most new builds don’t even include basics like window coverings and kitchen appliances. Perhaps I ought to do a separate post for this one topic alone!
- Opportunity cost of the move. You may need to take a week or two off work to facilitate a move. This can lead to its own set of stresses above lost wages. Try to set a timeframe, budget vacation days and stay within them.
So why bother moving?
Clearly not is all doom and gloom in a move. If it was so, Canadian Real Estate wouldn’t be as hot as it’s been for the last decade and a half. Whether your first home is too small for a growing family, or a new work from home mandate requires some personal business space – sometimes you just come to a place where it’s time for change.
My advice to these clients is simple – your priorities come first. If a backyard for your family is your priority, then the costs of moving is just table stakes. If your priority is to build wealth through Real Estate, then maybe instead of upsizing, you will be better off in the short term with two smaller units generating income. We only live once and every decision we make is a balance between our immediate pleasure and the long term bricks we lay towards retirement.
With principal residences being sheltered from taxes, it does make sense in the long run to grow this asset as it will ultimately be the single most profitable piece in your portfolio. However, growing this too quickly may severely hinder your short term cash flow and ability to save and invest.
I’m ready to move, now what?
Once I assess and understand a clients needs, I will always lay out four options and realistic outcomes. Note the nature of the outcome is dynamic in relation to the state of the economy and where we currently are in the cycle.
- Sell your Primary home first, then buy a property after. This is the best scenario if you are set on moving and believe the market is going down over the short term. Benefit here is you get the price you want for your existing property and if not, you reserve the right to hold and stay put. You have the leverage to methodically plan out your next move. The biggest risk here is you catch the market on an uptrend, and in effect, end up selling low and buying high right after. For clients who prefer the safety of knowing their property is sold first in a market uptrend, it is important to be extremely aggressive in the hunt once your property is sold.
- Buy your new home first, then sell yours after. This is the best scenario if you are set on moving and believe the market will heat up. Here, you can lock in a new home at todays lower price, and sell your unit into the market as it moves higher. Obviously, the risk here is you don’t get what you are expecting on the sale side and end up with two homes. You can imagine how stressful this can be. One thing that can be done on the buying side to help mitigate this risk is setting a close date as far out as possible.
- You don’t sell your home. Instead you shift strategies and buy smaller. I know this is kind of a curveball, but most of these move ups are due to the massive appreciation in home values over the last year. Homeowners are refinancing their home for more debt and taking this equity to upsize their homes. Instead, another approach is to stay where you are, take the same equity out through a mortgage refinance and buy an investment unit. If wealth generation is the end goal, I recommend selling as few times as possible in your lifetime. Each time you buy, you eat the cost of a LTT, and each time you sell, you eat the cost of agents fees. For example, if you worked hard to achieve $100,000 in gains, why give up $30,000 of it each time you move? This is especially true if you plan on buying another property down the line.
- Do nothing. Travel instead. Point here is a bigger house or more money may not be your end goal to begin with. If you’re happy and content with where you are, maybe put some money into a renovation project to extract more value from your existing home. Finish that basement, or modernize your kitchen to make something old into something new. Strange coming from a Realtor right?
Don’t rush, let’s talk it out
If you are thinking of a move, or just want to chat strategy, feel free to send me a message. At the end of the day, it’s hard to gloss over everyone’s personal circumstance with some general ideas. Our goals, wants and needs are constantly changing and what might make sense today may end up hurting you down the road.
Realize that in any decision there are multifactors and a handful of professionals ready to take your money. Don’t get me wrong, when the time comes you surely want professionals on your side, but make sure they are working for you after you made your decision versus being the reason for your decision to begin with.
Whichever way you go, I wish you the best of luck on the next big move.
Of course, before you pull the trigger, have fun with our very own purchase calculator to help you navigate the financial costs!
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