Your house costs more than you think–Rule #6
Be prepared for something for which you are not prepared. Real estate transactions and their financing are not quite so catastrophic as to demand the full force of Murphy’s Law. However, after hundreds of real estate transactions, I can promise you one thing: something always goes wrong.
Your house costs will be higher than you calculated
Most times these are minor annoyances that cost only a few thousand shekels to fix. Some times these are actual deal breakers that force considerable additional unforeseen costs, including extending rental contracts or finding a new property. Here is a brief list of some additional house costs that were incurred by recent clients:
- problems with the property deed
- problems with building permits
- low appraisal
- late additional demands by the sellers
- sellers who don’t vacate the property on time
- previously unnoticed problems with the house
- the kitchen needs to be replaced
- the air conditioner needs replacing
Use your imagination. Unfortunately, almost anything else could happen, from legal issues to physical problems with the building to problematic sellers. How much will this add to your house costs?
I have seen cases where there are considerable additional house costs after everything has “been closed”. So far as the mortgage goes, these costs don’t exist. Nor do the fees that you pay to the tax man, the lawyer, me, the agent (I hope that you didn’t waste your money on a real estate agent).
Let’s illustrate this with some round numbers. You are purchasing an apartment for 2 M shekels. You have checked and your purchase tax will cost 22,367 (check your actual tax amount here). Other costs that you have calculated total 80,000 including paint and polish, movers, lawyers, my fee and a new sofa.
You have been very prudent and saved an impressive 900 K in cash, and good news, the numbers add up. 1.2 M in mortgage, 800 K out of pocket to the sellers, and another 100 K to cover the additional costs. You sign on the contract to purchase a flat that meets your requirements and then …. only once the mortgage bank sends out an appraiser you figure out that the beautiful extra room on the roof that sold you on this apartment was built without a permit (even though the right to build there is written on the property deed). The appraiser apologizes but can only base the value on 95 m2 that were built according to the building permits and not on the extra 25 m2 that haven’t been built according to permits. Instead of 2 M, the appraiser has stated the value of the flat at 1.8 M.
What are you going to do? If you have a good salary, we can usually still get you the same funding (at less advantageous terms). But still, what are you going to do? If you have a good lawyer, she might be able to get you out of the purchase contract, but now you have to start all over, and maybe pay extra months of rent that you weren’t counting on. Maybe you want to get the permits yourself, pay the penalties and the appraisals and the architects out of your pocket and hope that the penalties are too bad. The cost of this can be anything from 20 K to 120 K. Maybe you want to ignore the situation and buy the apartment as is, with the full knowledge that one day you might have to deal with the problem (you will still have the added cost of a worse mortgage).
Be prepared to pay more than you think
Wishful thinking is not a good plan for calculating your house costs. Make sure that you have quick access to an additional 5% of the transaction price. Usually you will need far less than this. However, if you want to make sure that you don’t have any problems in completing your purchase, be prepared.
Corollary to Real Israeli Mortgage Rule #6: add an “unforeseen costs” line to your house cost budget.