Monday, November 30, 2009

A word about Mortgage Brokers

When it comes to securing a mortgage I prefer to use a mortgage broker. I know a lot of people just walk into their local bank branch and ask for a mortgage, but to me, that makes no sense. I'd never buy a car by walking into my local dealership and buying whatever car they offered me, so why would I buy a mortgage that way? I'd much rather shop around for the best deal.

Not all mortgage brokers are created equal. We had one crappy broker in the past who, although he got us a good rate, forgot to send us some paperwork and we almost lost the mortgage. So, I think hearing a testimonial from someone who had a good broker is helpful.

Our current broker is Rob McLister from I really can't say enough good things about him. We have used him for three mortgages now and he has always gotten us a great deal. He works harder than anyone I think I have ever met and his turn around time on requests is usually exceptionally fast. He is based in Vancouver, so I have never actually met him, but in today's Internet enabled world, that doesn't seem to matter. He used to have an office in Toronto, so he is familiar with any Ontario-specific rules or laws and he is great at recommending more sophisticated mortgage arrangements that can save you thousands in interest charges over the life of the mortgage. He has twice arranged mortgages for us to do a Smith Manoeuver. You will never get that service at your local bank. Rob and his wife Melanie also write a blog ( which is a great source of information on anything at all to do with mortgages.

I picked Rob because of his blog and because he is a regular contributor to several other financial blogs I follow. In particular, when we first started thinking about arranging a Smith Manoeuver mortgage, I needed to find someone who I felt had sufficient experience in the intricacies of this technique. Rob's frequent blog posts and comments on other blogs gave me that assurance.

Friday, November 27, 2009

The home inspection

Once we decided that we wanted to make an offer, we commissioned a home inspection. A home inspection costs about $400, but is essential, especially for older homes. By having an inspection done, you can be informed about potential additional expenses you will incur once you own the home. This in turn will affect your offer on the house. There is nothing wrong with buying a house that needs repairs. But it's essential to know what the cost of those repairs will be so that you can figure out how much you are willing to pay for the house.

In our case, the inspector said the home was in good shape except for a couple of expected problems. For one, the roof needs re-shingling and second, as might be expected with a house built in the '50s, the basement was not waterproof. You can see it in the picture below, which was taken after three days of constant rain. On one side of the house, the floor is damp and the foundation wall is discoloured. This discolouration is called efflorescence and it is an accumulation of crystalline salts on the masonary walls. This mineral residue is what's left after moisture, which seeped through the walls, has evaporated. There is moisture on this wall because the grading of the soil outside the wall slopes in toward the wall. Hence, water that falls on the ground drains toward the wall and then seeps down into the ground against the foundation. It would be easy to fix this problem by fixing the grading outside. However, to be sure the basement will stay dry, it really should be wrapped in a plastic membrane.

In modern homes, the basement is wrapped in a waffle-like plastic membrane, which allows water to flow down the wall to a perforated plastic drain tile that sits beside the footings of the basement. The drain tile (weeping tile) is usually covered with coarse gravel or crushed stone and, in urban areas, is connected to the city storm sewers to take water away. This keeps the basement of modern homes nice and dry. But in older homes, this type of treatment was not done. Before our basement can be properly finished, it should be waterproofed, otherwise water that may seep through the walls will cause mold to form inside the newly drywalled basement walls. Besides being smelly and unsightly, it is also a health hazard.

Waterproofing the basement requires digging out the dirt outside the basement walls and installing the plastic membrane and weeping tile. This will cost about $20,000. Re-shingling the roof will cost about $10,000.

In addition to this, the inspector told us that it would not be unusual for the sewer line from the house to city sewer to be in rough shape and may need replacing (it is 50 years old after all). For about $400, we had Mr. Rooter inspect the sewer with a camera, which confirmed that the sewer, while not blocked, was corroded in several places and had holes in it. While it is not really a problem right now, if we ever had a tree root grow into the sewer, the necessary cabling or pressure flush to clear the way would most likely cause irreparable damage to the sewer. The cost to replace the sewer line could be as high as $10,000.

So, we see that there are a fair number of expenses that we should plan on after we take ownership of the house. However, given that we are planning on renovating and may be adding an addition on to the house, the cost of the waterproofing and sewer repairs could be cheaper because the heavy equipment required for digging will already be on site.

As mentioned above, a home inspection is essential before you make an offer on a house. However, it also pays to educate yourself. A great book that I really liked was "The Holmes Inspection: Everything You Need To Know Before You Buy or Sell Your Home", by Mike Holmes. It is quite informative about what to look for in a house, but is also quite informative about the actual home inspection process as well.

Mike Holmes was on the radio recently talking about picking a home inspector. According to him, the biggest mistake people make when buying a new home is waiting until the last minute to pick a home inspector and they end up with someone who they know nothing about. As it turns out, not all inspectors are created equal. In fact, it takes only two weeks of training to become a licensed inspector. For all you know, that person may never have even picked up a hammer before. Mike suggests lining up your inspector as soon as you decide to start looking for a home. That way, you can check him/her out thoroughly before you need to call on him/her. As with all contractors, Mike suggests asking lots of questions and checking references. Mike says you should pick an inspector who has worked in the building trade for some time before becoming an inspector. If you live in Toronto, you can use Mike, who runs his own home inspection company. His inspections cost between $1000 and $1500 and take all day to complete. He brings a thermal camera and a snake camera with him so he can find all kinds of surprises behind walls that normal inspections could not find.. He is more expensive than any inspector I have ever heard about before, but you know with Mike that it is going to be extremely thorough.

Sunday, November 22, 2009

Negotiating the purchase

Once the offer has been made, negotiating with the seller and waiting for your conditions to be satisfied is likely one of the most stressful times in purchasing a house.

As I mentioned in the earlier post, our offer for the house contained one condition; 5 days to arrange appropriate financing on the house. Actually, our mortgage broker had already told us that to try and find financing for both the purchase of the house and the renovations up front would take 6 days. However, our agent advised us that any condition on an offer of longer than 5 days would likely be rejected outright. So, instead we put in a condition of 5 days to find appropriate financing, with the hope that if our offer was accepted that our broker could come through sooner than promised, or that by the time 5 days had elapsed, the seller would be so invested in the sale that asking for an amendment to the offer of an extra day to secure financing would be approved.

Unfortunately, when we made the offer, the seller countered with a new condition of 4 days to secure financing. We accepted this condition, aware that we would probably have to ask for more time to secure financing, but it was a risk we were willing to take. After all, we had nothing to loose by accepting the new condition. If we rejected the counter offer and insisted on 5 days, the seller could have picked the other buyer right there and then.

After 4 days, sure enough, our broker had not secured financing, and we asked for an 1 day extension, which the seller readily agreed to. On the fifth day, our broker had found a bank willing to give us the appropriate financing, and the bank sent an appraiser out to the property. However, the appraiser put the wrong address on his report back to the bank. As a result, the bank would not accept the report. Time ticked by with numerous back and forth phone calls, and by the end of the business day, the bank still had not approved our financing.

So we asked for another one-day extension, which was not so readily accepted. In fact, I felt some pressure from our own agent to remove the condition of appropriate financing from the offer if we wanted to secure the house. However, my common sense told me that would be a dumb idea. We asked our agent to ask for another extension. Initially she was very reluctant and told us that the seller's agent would not accept another extension, so I actually had to order her to ask anyway (this is where I began to wonder if the agent was working with our best interest in mind). I figured we had nothing to loose by asking. If the seller said no, then we would deal with that outcome, but if we didn't ask we would never know. So our agent asked. And the seller's agent came back and said that five days was plenty for arranging financing and we should have it by now. I guess they felt like they were being jerked along a bit. So, we explained the muck up with the bank's appraiser and offered to increase the the downpayment by $5000 to try and show that we were serious about purchasing the house. We would have also been willing to change the closing date, if requested. However, I was not willing to waive the condition that appropriate financing had to be secured. In the end, the seller was not happy about it, but they gave us another day to secure financing, which is all we needed. On the sixth business day, the bank approved our financing and we waived the last condition on the purchase.

Throughout this process, we tried not to become too emotionally attached to the house. We knew what the property was worth to us and we were always prepared to walk away from the deal if our most basic needs could not be met. For us, if the seller had come back and told us that we could not have a sixth day to secure financing, then we would have told them that they would need to find another buyer.

Friday, November 20, 2009

Making an offer on the house

One of the scenarios that I have seen a lot in the Ottawa real estate listings is to place the house on the market for a week or so before accepting any offers. In this case, a specific date and time will be given for when offers will be accepted. This gives potential buyers the time to look at the house, arrange financing and get an inspection done before making an offer. In that way, they can hopefully make an unconditional offer on the house. The other side to this, of course, is that if there is a lot of interest in the house, then a number of potential buyers may show up at the specified time to make offers. This is what happened to us.

Of course, you never are totally sure if another potential buyer is going to show up, so it pays to show up with two offers in hand. The first offer is the low offer that will be given if there are no other potential buyers standing on the curb. The second is the high offer, which will be given if competing buyers do show up. We had two such offers in hand, and sure enough, another potential buyer showed up, so we threw out the low offer and went with the higher one.

The way the process worked for us was that each agent individually went into the house to make their pitch on behalf of their client. The process takes about 10 minutes per agent. After hearing both pitches, the seller picked our offer,with one condition.

Our offer contained the condition that we wanted 5 days to arrange appropriate financing. We knew we wanted to renovate and it was going to take our mortgage broker a little longer to arrange the financing to both buy the house and renovate it. We had already completed a house inspection, so the offer was not conditional on an inspection. However, the seller wanted us to shorten the time to arrange financing down to 4 days. In the next post, I will get into the details of the negotiation.

Purchasing the house - finding an agent

When we purchased the house we did not have a real estate agent, so we asked the agent who showed us the house to be our agent. This agent worked for the brokerage that was selling the house, so the same brokerage was now representing both the seller and the buyer (us). This type of arrangement is called a "Dual Agency" We could do this because although the brokerage had an agreement with the seller to act as their agent, it was another realtor within the brokerage who was the seller's agent. Each agent is supposed to work with their client's (either the buyer's or the seller's) best interests in mind.

There are pros and cons to going Dual Agency rather than getting another agent from a different brokerage to represent you. The main Pro was the fact that the brokerage gave the seller a 1% discount on the fees when the buying agent was from the same brokerage. Thus, all other things being equal, our offer should seem more attractive. The down side is that you are never sure how much information is being shared between the agents and whether or not your best interests as a buyer are really being represented by the agent. In our case, the agent was representing us only on this one offer. If the offer fell through, they would cease to be our agent. Therefore, there was an incentive for the agent to get us to buy this house over another house. If we had used an independent agent from another brokerage, that incentive would not have existed because the agent would not care so much if we bought this house or another house.

In the end, going Dual Agency worked for us. But for it to work I think you have to have a clear view in your mind of what the value of the property is to you and be prepared to walk away from the deal.

The house

Before talking about the renovations, let's take a look at the house. It's a simple 1950's era bungalow on a 56' X 119' lot. The average size for a lot in this neighbourhood is 50' X 100'. The land slopes down at the back and is shaded by some lovely mature oak trees. Also, because of the configuration of the next road over, there is a large triangular area of public land behind the house, giving us another approximately 40' before the start of the neighbour's backyard. This public land has become common land for the surrounding four or five houses and is well kept, but nobody can build on it.

Thursday, November 19, 2009

The adventure begins

A couple of months ago we bought a house in a neighbourhood of Ottawa, Canada that we really like. While the neighbourhood is great, there are, unfortunately, not too many houses in the neighbourhood that we would consider moving into. Most of the neighbourhood consists of 1950's era victory houses, supplied to returning war vets or bungalows of similar vintage. It was clear that if we were going to move into this area that we would have to buy one of the older houses and either tear it down and build new or renovate the existing house up to our standards. So, when a house that we thought we could work with on a great lot came up for sale, we jumped in with both feet. This is our story.

We thought we would record our story here for a couple of reasons. First, this is our first foray into this kind of adventure, so we wanted to record it. There is so much we have learned already in just two months, that we didn't want to forget it should we decide to do this again in a few years. Second, when we started looking at houses in this neighbourhood and thinking about renovation options, we found it very useful to read other people's blogs about their renovation work. However, there are very few blogs from Ottawa, so we thought this blog would help others in Ottawa who are thinking of undertaking a major renovation project for the first time. We intend to record all of our activities and the costs, so that if you are contemplating a similar move you will have a good idea of what your in for.

Here we go!