Financial success often involves making good decisions and avoiding big mistakes.
Parents who spend the time to teach their children the basics of finances will help start them off on a more informed path.
One of the first big decisions your adult child may make is with regards to the purchase of a home. They will have a higher probability of making a good decision when you guide them through all the basic information of home ownership. You can be the steady hand during a stressful and emotional decision.
The following are the ten basic pieces of information they should know:
1. Working with a Realtor
The first thing I would tell your children is the importance of working with a good Realtor. Also, teach your children that the purchaser is not the one who pays the commissions when the house sells. The seller of real estate pays a commission that is typically split between the real estate agent who listed the house for sale and the Realtor who represents the buyer. The Realtor should know exactly what you are looking for and be able to provide you realistic offer prices that fit your budget.
2. Why you need to work with a lawyer
I would also recommend talking to your children about finding the right lawyer or notary to work with when purchasing real estate. The branch of law that deals with the transfer of legal title of real property from one person to another is called conveyancing. Ideally, you know of a good lawyer that deals with conveyancing that you can introduce to your son or daughter. The lawyer will be able to assist with holding the money (in trust), handling the transfer documents, ensuring a clean transfer for title with land titles (i.e. ensuring no liens, etc.), and preparing the purchaser’s statement of adjustments.
3. Explain B.C. Property Transfer Tax (PTT)
Although the buyer does not have to worry about paying real estate fees, they do have to be prepared to pay the PTT. For the purposes of explaining the PPT, we will use the average selling price of a single-family home in Victoria, which was $846,500.00 at the end of September, according to the Victoria Real Estate Board. In B.C., the PPT is a tax charged at one per cent on the first $200,000 of the purchase price and two per cent on the remainder. For the average selling price of a single-family home in Victoria, your child will have to pay the following:
$200,000 x 1 per cent =$ 2,000
$646,500 x 2 per cent = $12,930
Protecting your most important financial purchase is prudent. Having home insurance will also be mandatory if your child has a mortgage with a financial institution. Consider pulling out your insurance policy and explaining the terminology to your child will give them some basic knowledge to help them get started. Your child should obtain an understanding of the different coverages and deductible levels, and how those decisions impact premiums. Sometimes insurance companies will request that certain improvements are done to the home to ensure continued insurability or avoid exclusions of coverage. Insurance companies are becoming more risk sensitive. As a result, they are requiring some home owners to go through a home inspection process to continue insurability. Insurance companies may hire third-party inspectors to assist with managing this risk. They will prepare a Residential Appraisal Report that would typically show deficiencies and recommendations that need to be addressed. These deficiencies and recommendations may result in future costs.
Often times, if your child has been renting, they may be unfamiliar with the concept of the total cost of utilities. Obtaining an understanding of the common utility charges, such as water charges, garbage pick-up, natural gas, electricity, sewer, internet and telephone will help them better prepare for the total cost of home ownership.
6. Assessed values
The assessed value of a property is broken down into the parcel land and the improvements (home and other structures). Many times during real estate transactions, the selling price is grossly different from the assessed value. It’s helpful to ensure your child understands that these values are not necessarily an accurate reflection of value.
7. Property taxes
Tax records are public information. At any time you can go into the municipal hall and look up the taxes due on the property. When you are looking at homes with a Realtor, they will also be able to provide the history of property taxes for any home that you are looking at. This information is readily available on the systems that Realtors have access to.
8. Building inspection
As parents, I think it is important to assist with the emotional aspect of purchasing a home. It may be far too easy for a child to quickly fall in love with a house without doing the full due diligence. Most people would say that it is prudent to get a building inspection done.
As with any profession, there are good inspectors and not-so-good inspectors. My personal experience with building inspectors is that they are not all created equal. Helping your child pick a building inspector with a good reputation is important. You want to help them find a building inspector that will take a very thorough look at the house go onto the roof, go into the crawl space/attic).
If you, or the building inspector, find serious deficiencies then you can either attempt to negotiate a lower price or walk away. Parents may have a more objective view of the condition, and work that would be required to maintain the property.
I once had a client that visited a house ten times prior to making a purchase — I loved hearing that. I realize that when good opportunities come along that buyers often don't have that flexibility. When you do make an offer on a home that you are interested in, I would certainly encourage your child to make it subject to a building inspection. This will enable you to do a thorough walk through with your child.
9. Initial costs
With any house purchase, you will have initial costs that need to be factored in.
Normally, appliances and window coverings are not included in the purchase price unless specifically included in the offer. Ensuring you have equipment to maintain the property (i.e. lawn mower, weed eater) is also a factor.
A thorough walk-through of the property will enable you to obtain an understanding of the other initial costs you would need to factor in. Sometimes helping your children pick up used items initially will assist them budget when excess cash flow is tight.
10. Financial terminology
Without opening your pocket book, you can help educate your children about financial terminology. Help them summarize the typical information that the bank will require for a mortgage application (two years of tax returns, notices of assessments).
Talk to them about saving and what types of accounts to put their savings into (Tax Free Savings Account, Registered Retirement Savings Plan or investment/bank account).
Discuss a plan on how to come up with the down payment. Ideally, when your child purchases their first home, they can get away from the cost of mortgage insurance.
In order to do this, they will have to put 20 per cent down.
Discuss the difference between variable rate mortgages and fixed rate mortgages with your children. In some home equity type mortgages, you can have a mixture of both variable and fixed. Another option is to have different durations or terms to maturity. As an example, your child could have half of the mortgage funds in a three year variable rate and half in a five year fixed rate.
Parents can also help children with financial support when purchasing a home.
Next week, we will outline some of the ways parents can help their children financially and how this is typically structured.
Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138. greenardgroup.com